What is a primary consequence of externalities in a market economy?

A primary consequence of externalities in a market economy is that they can lead to market failure, where the true costs or benefits of a good or service are not reflected in its price. This happens when a third party, who is not involved in the transaction, is affected by it. For example, if a factory pollutes the air while producing goods, the nearby residents suffer health problems but do not receive any compensation, leading to negative externalities. As a result, the factory may produce more than what is socially optimal, causing harm to the community and the environment. This misalignment can prevent resources from being allocated efficiently, ultimately harming society as a whole.