In the context of externalities, when the production of a good creates a negative impact on third parties, such as pollution, this is referred to as a _____ externality.

When the production of a good leads to harmful effects on people who are not directly involved, such as pollution affecting nearby communities, it is called a negative externality. This means that the costs of producing the good are not fully reflected in the price, and others bear some of the harmful effects without compensation. For example, if a factory releases smoke into the air, nearby residents might suffer from health problems or reduced air quality, even though they are not part of the factory's business. Because the factory does not pay for these negative impacts, it may produce more than what is socially optimal. Understanding negative externalities helps us see why regulations or taxes might be needed to protect those affected.