Externalities occur because economic agents have effects on third parties that are not parts of market transactions. Examples are: factories emitting smoke and did, jet plains waking up people, or loudspeakers generating noise. These activities are all having a direct effect on the well-being of others that is outside direct market channels.

Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid.  

• Smokers ignore the harmful impact of toxic 'passive smoking' on non-smokers 
• Air pollution from road use and traffic congestion and the impact of road fumes on lungs 
• External costs of scraping the seabed for supplies of gravel 
• The external cost of food waste 
• The external costs of cleaning up from litter and the dropping of chewing gum 
• The external costs of the miles that food travels from producer to the final consumer 
• The externalities linked to the oil sands project in the Canadian wilderness