External costs are expenses that are not reflected in the market price of goods or services. These costs arise when the production or consumption of a product negatively impacts third parties or the environment. For example, pollution from a factory can harm the health of nearby residents, but the factory does not pay for these health-related costs. These costs can lead to market failures, where the true cost of a product is not fully accounted for. To address external costs, governments may implement regulations or taxes, encouraging businesses to consider the broader impact of their activities on society and the environment, such as carbon taxes or pollution control measures.