Under the free market structure, market failure basically constitutes an adverse or negative economic phenomenon which causes an inefficient distribution of goods or services in the market leading to the disruption of the socially optimal or rationally desirable market outcome. The socially undesirable or unoptimal market outcome caused by any market failure can evidenlt cause adverse economic welfare impacts in the free market thereby affecting the overall economic welfare distribution among the concerned economic entities or agents in the market. Now, one of the prominent and widespread practical examples of market failure can be considered as negative externalities. In Microeconomics, a negative externality is basically referred to as any direct or indirect and uncompensated negative consequence or impact of any market outome or economic activity that can adversely affect the welfare distribution of the market outcome among the concerned economic entities in the market. Some of the common examples of negative externality in a free market setting can be negative health or medical impacts of cigarette consumption or smoking, industrial pollution, chemical contamination, environmental detriments, and so on.

In this instance, we can ideally emphasize on the negative welfare impact of industrial pollution under a free market structure. Let's suppose that a manufacturing firm emits a certain level of industrial pollution for every unit of the good that it produces which further causes negative health impacts on the communities and people locating close to the manufacturing factory or nearby. Now, this negative health impact of the pollution emitted by the manufacturing in the course of its normal and regular operation is not accounted for in the market outcome as the goods produced by the firm are bought and sold in the market at the market equilibrium price. Under general circumstances, the issue of negative externality generated by the industrial pollution caused by the manufacturing firm can be possibly mitigated either by imposing a negative externality tax equivalent to the additional or incremental health/medical and social damage causes by the pollution emitted or caused each additional unit of production by the firm or through private negotiation between the communities or people residing nearby to the factory. It must be noted that the main objective is to fairly and equitably compensate to the victims of industrial pollution caused by the firm for being adversely affected. The per-unit of production negative externality tax iposed by the government is usually equal or identical to the marginal or incremental damage or harm caused by the concerned negative externality and the private negotiation between the concerned entities or parties is practically contingent on and often guided by the private property rights. Therefore, in this regard, one of the important empirical or research questions could be which specific policy or measure is most effective in mitigating or alleviating tenegative externality caused by indstrial pollution and under which circumstance/s. For example, the teflon production by Dupont Chemical Company during the 1950s caused a massive chemical contamination in Parkersburg, United States which severely endangered the lives of the local communities and animal habitat in the local area and the surroundings. This resulted in a persistent legal controversy and several judicial proceedings but any reasonable conclusion on how the negative externality caused by the chemical pollution or contamination in the city of Parkrsburg could be fairly or equitable compensated to the local residents, animal habitat, and communities who are directly or indirectly affected by its negative impacts. Hence, as a point of reference, the economic question pertaining to the most socially equitable and optimal solution to the negative externality associated with industrial or chemical pollution or contamination is extremely crucial and pertinent.