In economics a negative externality is “the imposition of a cost on a party as an indirect effect of the actions of another party”. To a non-economist this line may not mean much so I will give some examples.
Petty theft from retail stores, especially those that sell a wide range of small items like supermarkets is a fact of life. Businesses install cameras, hire security and employ various technological solutions to try to minimise losses from theft, but they cannot eliminate this phenomenon. What happens is they estimate total losses incurred during the year due to theft and consider it to be an expense. It will simply become another cost of doing business like paying rent or salaries. But that cost will not come out of the company’s pocket. It will simply be incorporated into the price of the products sold. Some people will gain by getting items free of cost, while everyone else who pays for them will end up paying a higher price. This is how negative externalities work. One person steal, while others pay the price.
Another non-monetary example from my personal life involves pedestrian crossings. I live in a middle-eastern country where driving culture is not the best. Since I started walking outside with my Dogess, I quickly learned that motorists are not guaranteed to stop for me when I am about to step on to a pedestrian crossing. Some won’t even stop when I am already walking on it. In an idea world, where I am reasonably certain that I will not be run over I will start crossing the road when I see a car at a medium distance approaching me. However, given my experience I now wait to see that he is slowing down before I step off the pavement. As a result, cars that could have continued moving and maybe have to slow down a little in order to give me way now have to come to a complete stop and start over because I have no way of knowing if they would have slowed down or run me over. Because of the actions of some, who can’t be bothered to slow down to let pedestrians cross (on a dedicated zebra crossing mind you), now everyone has to stop because I have no way to tell who is a maniac. This is another example of a negative externality where the cost is something even more valuable than money – time! Just because something seems like a good idea and a single individual or a small group will gain from, does not mean that the greater society won’t have to pay the price. Of course, the cost of stolen goods divided among a large number of people will be very small, but it does not mean that no one will pay that price.