What are external costs and how do they relate to market failure?

External costs, also known as negative externalities, are costs incurred by third parties who are not directly involved in an economic transaction, such as pollution affecting nearby residents. These costs are not reflected in the market price of goods or services, leading to overproduction or overconsumption of harmful products. This misalignment between private costs and social costs can result in market failure, as the true cost of production and consumption is not accounted for, leading to inefficient resource allocation and negative societal impacts. Addressing external costs often requires government intervention, such as taxes or regulations, to correct these market failures.