What kinds of situations does the term 'negative externality' best describe?

The term 'negative externality' refers to situations where certain economic activities impose costs on third parties who do not participate in the transaction. In this context, option C captures the essence of negative externalities effectively. It highlights that there is a disconnect between the private price paid in the market and the societal costs associated with a product or service. This means that when goods are produced or consumed, the full impact of these activities—such as environmental damage, health impacts, or social costs—is not accounted for in their pricing. As a result, society bears additional costs that individuals or companies involved in the transaction do not consider.

This situation often leads to overproduction or overconsumption of goods and services that have negative externalities because participants in the market do not face the true costs associated with what they are consuming or producing. For example, a factory might produce goods that pollute the air, leading to health problems in the surrounding community, yet the prices consumers pay do not include these societal costs. Thus, the negative impacts are borne by society rather than reflected in market dynamics.

Understanding this concept is crucial for policymakers and investors who aim to promote sustainable practices, as it underscores the need for regulations or interventions to align private incentives with social costs.