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There is an oil refinery which refines crude petroleum and sells it in the market. The output of the refinery is the amount of oil it refines. We can estimate the value added of the refinery by deducting the value of intermediate good used by the refinery from the value of its output. The value added of the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their well being will fall. Pollution may also kill fish or other organisms of the river on which fish survive.

Negative externalities

Oil Refinery Polluting nearby area cause harm to the people who use the water of the river and also pollution may kill fish or other organisms of the river on which fish survive. Thus, it is an example of a "Negative externality." Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). A positive externality denotes the benefit derived whereas, and a negative externality denotes the harm caused.