Why do economists describe pollution as an external cost?

Economists describe pollution as an external cost because it represents a negative externality—a situation where the costs of an economic activity are borne by third parties who were not involved in the original transaction.12

In a standard market, prices are determined by the interaction between buyers and sellers. However, when a business produces goods while generating pollution, it often does not pay for the resulting environmental or social damage, such as health issues or property degradation. Because these costs are not reflected in the price of the product, the producer is effectively "externalizing" them onto the community.134

This creates a market failure because the market fails to account for the true social cost of production, leading to higher levels of pollution than would be socially optimal. To address this, environmental law and economics often utilize the "polluter pays" principle, which seeks to "internalize" these costs through mechanisms like Pigouvian taxes, regulations, or permit markets, thereby forcing producers to account for the harm caused by their activities.1245