What is the primary reason that negative externalities lead to market failure?

Negative externalities occur when a person's actions have harmful effects on others who are not involved in the transaction. This leads to market failure because the true costs of these actions are not reflected in the prices of goods or services. For example, if a factory pollutes the air while producing goods, the community suffers from health problems, but the factory does not pay for these costs. As a result, the factory produces more than what is socially optimal, leading to overproduction and negative impacts on society. Ultimately, this disconnect between private actions and public costs disrupts the efficient functioning of the market.