Externalities always have negative effects on society and require government intervention to be addressed.

Externalities are costs or benefits caused by an activity that affect other people who did not choose to be involved in that activity. While many people think that externalities are always negative, that is not true; they can also have positive effects. For example, when a company plants trees, it benefits the environment and the community, which is a positive externality. However, negative externalities, like pollution from a factory, can harm people's health and the environment, requiring government action to reduce the damage. Governments may step in by creating rules or taxes to limit harmful activities and encourage companies to consider the effects of their actions on others.