How does pollution as a negative externality affect market efficiency according to economic theory?

Pollution is considered a negative externality because it imposes costs on people who are not directly involved in a transaction. For example, a factory that produces goods might release smoke into the air, harming the health of nearby residents. In economic theory, this means that the true cost of production is higher than what the factory pays for creating its products. As a result, the market does not account for these extra costs, leading to overproduction of goods and less efficient use of resources. This situation can be improved through regulations or taxes that make the factory pay for the pollution it creates, helping to align private costs with social costs and improve overall market efficiency.