A market failure in the form of an externality arises when

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A market failure occurs when the price of a good does not reflect all the costs and benefits associated with its production and consumption. This is known as an externality. For example, if a factory pollutes the air and water around it, the cost of the pollution is not included in the price of the goods it produces, but is instead borne by society. Likewise, if a person receives a flu shot, the benefits of that shot (e.g. reduced risk of getting sick) are not fully captured in the price of the shot. In both cases, there is an externality and a market failure.

A Market Failure in the Form of an Externality Arises