If a steel manufacturer does not bear the entire cost of the sulfur dioxide it emits, it will emit a higher level of sulfur dioxide than is socially efficient. Externalities in market transactions are commonly referred to as spillovers since they have an impact on parties outside those directly involved.
An externality is the impact of a market trade on a party that is not a part of the exchange. Externalities can be either good or bad. Having country manufacturer music blare into your home every night would be a bad externality if you detest it. A harmful externality is pollution. A demand and supply diagram is the tool economists use to depict the social costs of production.
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