How do externalities influence market power in an economy?

Externalities are effects that happen when the actions of individuals or businesses impact others who are not directly involved in those actions. For example, if a factory pollutes the air, the people living nearby may suffer health problems, even though they are not part of the factory's operations. This situation creates a market failure because the factory does not pay for the harm it causes, leading to an imbalance where the factory’s profits do not reflect the true cost to society. As a result, businesses with significant market power may not feel the need to change their practices since they are not held accountable for these negative effects. Ultimately, this can lead to less competition and more inequality in the market, as those who can afford to ignore externalities may dominate.