A negative externality is a cost imposed on a 'third party' as a result of the activities or buyers or sellers.
Most transactions in market economies create externalities - some of which are beneficial - yet not paid for by the beneficiaries - and some have a detrimental effect on others, although they are not compensated by those causing the negative effect.
Negative externalities associated with consumption are any negative effect on third parties as a result of the acquisition and use of goods and services. An example of a commonly discussed external cost of consumption is the amount of waste plastic discarded after use. Discarded waste can cause harm to others in a variety of ways, including visual pollution, toxic waste, and the loss of the use of land.
Other costs of consumption include harm to others as a result of alcohol consumption, the impact of 'passive' cigarette smoking, and the carbon and other emissions resulting from travelling to and from stores and other venues, such as theatres and restaurants.
Diagrammatically, the impact of a negative consumption externality is to push the Marginal Social Benefit Curve down, below the Marginal Private Benefit curve.
In other words, at any level of output (Q) the 'actual' benefit to the community of consumption is reduced as a result of the consumption externality.
Negative production externalities are any negative impact on a third party as a result of the process of production and distribution of goods and services.
Factories and offices use energy which is likely to have been derived from fossil fuels, which are a source of pollution. Many processes, such as cloth production, use chemicals which may find their way into rivers, and into the food chain.
Road congestion can also be considered a negative production externality. The rise of online shopping has increased road usage by haulage companies, which in turn increases congestion and lead to other harms, including air and noise pollution and lost time waiting in traffic.
Toxic waste explained - National Geographic
Graphically, external production externalities shift the Marginal Social Cost up, above the Marginal Private Cost curve.
In other words, at any level of output (Q) the 'actual' cost to the community from production is greater than the sum of the 'private' costs borne by firms.
In both cases, if left unregulated, negative consumption and production externalities would lead to an inefficient allocation of scarce resources.