Negative externalities can be described as:

Negative externalities occur when the actions of individuals or businesses have harmful effects on third parties who are not directly involved in the transaction. This concept is fundamental in economic theory as it highlights how private decisions can lead to social costs that are not accounted for in market transactions.

When we say negative externalities cause costs imposed on third parties, it means that these costs are borne by individuals or communities who do not have a role in the making of the decision that led to these costs. For example, pollution from a factory can negatively impact the health of nearby residents, leading to increased medical costs and reduced quality of life for those individuals, even though they are not part of the transactions between the factory and its customers.

In contrast, benefits that enhance overall welfare represent positive externalities, where third parties gain advantages from the actions of individuals or businesses. Government policies to support the market typically refer to regulations or interventions designed to correct market failures, while price discrimination practices by sellers involve charging different prices to different customers for the same good or service, which is related to market strategies, not external costs. Therefore, understanding negative externalities and their impact on third parties is crucial for addressing issues like market failures and devising appropriate policy responses.