What is the primary effect of negative externalities on market equilibrium?

Negative externalities occur when a company's actions have harmful effects on others who are not directly involved in the transaction. This can lead to an imbalance in market equilibrium because the costs of these negative effects are not reflected in the prices consumers pay. For example, if a factory pollutes a river, the nearby residents suffer from poor water quality but do not receive any compensation, which means the factory's costs are lower than they should be. As a result, the factory produces more than the socially optimal amount of goods, leading to overproduction and inefficiency in the market. Ultimately, this situation can cause harm to society and the environment, highlighting the need for regulation or intervention to correct the market outcome.