What term refers to the negative impact of an economic decision on those not directly involved in the transaction?

The term that refers to the negative impact of an economic decision on those not directly involved in the transaction is known as an externality. Externalities occur when the actions of individuals or businesses affect others who are not part of the decision-making process.

For example, if a factory pollutes the air while producing goods, the local community experiences negative health effects. These effects impact individuals who did not consent to the factory's operations or its side effects, illustrating a classic example of a negative externality. Understanding externalities is essential in macroeconomics because they can lead to market failures, where the efficient allocation of resources is not achieved, prompting the need for policy intervention to address these unaccounted costs.

The other terms have distinct meanings in economics. An incentive refers to something that motivates individuals to act in a certain way, often related to rewards or costs. Intervention typically involves government actions aimed at correcting market failures or influencing economic activity. A trade-off involves the idea of sacrificing one good or service to obtain another, highlighting the opportunity cost of making decisions. Each of these concepts plays a role in economics but does not directly address the impact on third parties like externalities do.