What term refers to unintended adverse effects on third parties in economic transactions?

The term that refers to unintended adverse effects on third parties in economic transactions is negative externalities. In economics, negative externalities occur when the actions of individuals or businesses impose costs on others who are not directly involved in the transaction. This means that the benefits of the transaction are not fully reflected in the market price, leading to outcomes that can be detrimental to societal welfare.

For instance, pollution generated by a factory affects the health and environment of nearby residents, who bear the costs of this pollution without having any say in the factory's operations or receiving compensation. This misalignment between private costs and social costs highlights a key reason why negative externalities are considered problematic in economic theory—they can lead to overproduction or overconsumption of goods that generate these adverse effects, ultimately resulting in market failure.

Other choices relate to different concepts within economics. Positive externalities, for instance, involve benefits experienced by third parties as a result of an economic transaction, such as increased vaccination rates leading to herd immunity. Market failure is a broader term that encompasses situations where markets do not allocate resources efficiently, often due to externalities, but it does not specifically identify the adverse effects. Consumer surplus refers to the difference between what consumers are willing to pay and what they actually pay for