Final answer:
Negative externalities in market activity lead to a lower level of output in the market equilibrium compared to the socially optimal level.
Step-by-step explanation:
Negative externalities occur when the production or consumption of a good or service imposes costs on third parties who are not involved in the transaction. Examples include pollution from industrial activities affecting surrounding communities or secondhand smoke impacting non-smokers. Government intervention or market-based solutions aim to address these external costs.
When market activity generates a negative externality, the level of output in the market equilibrium is lower than the socially optimal level. Externalities are an example of market failure, where the private market fails to achieve the efficient output. In the case of pollution, the social costs of production exceed social benefits to consumers, resulting in the market producing too much of the product.