A factory pollutes a river, affecting local fishing. What type of market failure does this represent?

This situation represents a negative externality, which is a type of market failure. A negative externality occurs when the actions of one party, such as the factory polluting the river, create harmful effects on others, like the local fishermen who depend on clean water for their catch. In a healthy market, the costs of production should reflect the true impact on society, but here, the factory does not bear the costs of the pollution it causes. As a result, the fishermen may catch fewer fish or have to deal with contaminated waters, which harms their livelihoods. For example, if the factory continues to pollute without consequences, the fishermen might lose income, leading to broader economic and social problems in the community.