What type of negative effect is caused when a factory's waste harms the local environment?

The correct response highlights the concept of an externality, specifically a negative externality. A negative externality occurs when the actions of individuals or businesses have adverse effects on third parties or the environment that are not reflected in the market price. In this case, the factory's waste harming the local environment illustrates how the factory's production process imposes costs on the community, such as pollution, that can negatively affect health, property values, and overall quality of life for those living nearby.

This type of effect is not accounted for in the factory's operating costs or profit calculations, which is why it is termed an externality. By generating waste that pollutes the local ecosystem, the factory creates a situation where the broader community bears the environmental and social costs, while the factory may benefit from lower operational costs due to ignoring these negative impacts. This distinction is crucial in understanding how economic activities can lead to unintended consequences that affect societal welfare beyond direct transactions.

The other terms provided do not accurately capture this scenario. Internalities refer to effects that only concern the individual or business in question, while profitability focuses on the financial gains of the business itself. Sustainability pertains to practices that meet present needs without compromising future generations, which is not directly about the negative impacts caused by