Negative externalities occur when the actions of individuals or businesses have harmful effects on others who are not directly involved in the activity. For example, when a factory emits pollution into the air, nearby residents may suffer from health issues or decreased property values. These costs are not reflected in the price of the factory's products, leading to an imbalance in the market. Another common example is traffic congestion caused by increased car usage. When more people drive, it can lead to longer commute times and increased air pollution, affecting everyone in the area. In both cases, the negative impacts are external to the decision-makers, highlighting the need for regulations or interventions to address these issues.