What is a Negative Externality?

Definition: A Negative externality is an undesirable impact on an unrelated third party because the production or consumption of a good or a service. In other words, it’s an unforeseen negative consequence from some market activity.

What Does Negative Externality Mean?

What is the definition of negative externality? Negative externalities occur when the social cost is greater than the private cost to produce or consume a good or a service. Put simply the decisions of a group of people have a negative impact on society, yet these people are not held accountable for the cost of their decision.

When negative externalities take place in an unregulated market, the costs are passed to consumers, thereby lowering the marginal cost of producers. However, as consumer decision-making considers the marginal cost and the marginal benefit, consumers do not absorb the negative externalities, thereby leading to market inefficiency, i.e. producer surplus.

Let’s look at an example.


A typical example of negative externalities is the sport utility vehicles (SUVs). The consumption of SUVs, i.e. of vehicles of 4,500 pounds, is very popular in the United States. However, such big cars consume a greater number of fossil fuel than an average car, thereby contributing to global warming and increasing fossil fuel emissions.

Moreover, according to data derived from the federal government and by regional governments, each year the state spends around $33.2 million to repair the road network as the SUVs have a greater weight than an average car, thereby damaging to the roadways.

Finally, although the SUVs provide their driver and passengers with an increased feeling of security due to their weight and size, there is a growing feeling of insecurity of the drivers and passengers of smaller cars on the roadways. The negative feeling of the passenger of smaller cars than SUVs is an example of negative externalities. Moreover, due to this feeling of negativity, it is possible to incur a greater number of car accidents as drivers of smaller cars lose their focus on the road while trying to pass by an SUV.

Define Negative Externalities: Negative externality means an unfavorable consequence to a third party because of an economic activity.