Negative externalities are negative effects/costs to a third party that is not considered by the main parties to a transaction. An example of this is pollution from factories. The consumers do not necessarily suffer directly from the pollution while the producers do not suffer additional costs from emitting pollutants. However, third parties may suffer from pollution. This causes an overproduction of the good because neither party to the transaction suffers from the negative effects of the pollution.

Externalities can be positive but the effect of negative externalities is negative to society as a whole. The main parties to the transaction may enjoy some benefits but society as a whole suffers.

Governments can choose to ignore externalities or impose solutions to fix the problem. A common tool is a corrective tax to allow the main parties to internalize the costs of the negative externalities. However, there can be different solutions depending on the externalities and its costs. Some regulations may be introduced to fix the problem.

There are many different economic problems caused by negative externalities. The existence of externalities is a market failure where the goods are not produced at their equilibrium quantities. Negative externalities such as pollution have an impact on public health, damage to property and natural resources, climate change, etc.