External cost refers to the negative effects of an economic activity that are not reflected in the market price of goods or services. These costs are borne by third parties who do not participate in the transaction, such as communities affected by pollution from a factory. For example, if a company produces plastic products and emits harmful waste, the health issues and environmental damage incurred by nearby residents represent external costs. These costs can lead to market failures, as the true cost of production is not fully accounted for. To address external costs, governments may implement regulations or taxes, encouraging businesses to internalize these costs. This can help promote more sustainable practices and protect public welfare.