If a factory emits pollution that causes health issues in the local community, what is the underlying cause of this externality?

The underlying cause of the externality in this situation is that the factory does not have to pay for the harm it causes to the community. When the factory produces goods, it may focus only on its profits and not consider the negative effects its pollution has on people's health. This leads to a situation where the factory benefits from lower costs while the community suffers from increased medical bills and reduced quality of life. For example, if the factory releases smoke that causes respiratory problems, the local residents might need to spend more on healthcare, but the factory does not bear those costs. This mismatch creates an externality, where private actions have public consequences that are not reflected in the factory's financial decisions.