Pollution is a negative externality. Economists illustrate the social costs of production with a demand and supply diagram. The social costs include the private costs of production incurred by the company and the external costs of pollution that are passed on to society.

Why is pollution an externality?

Negative and positive externalities In the case of pollution—the traditional example of a negative externality—a polluter makes decisions based only on the direct cost of and profit opportunity from production and does not consider the indirect costs to those harmed by the pollution.

Is pollution an external benefit?

Pollution is termed an externality because it imposes costs on people who are “external” to the producer and consumer of the polluting product.