Inhaled substances, such as consumer products, chemicals at the workplace, and nanoparticles, can affect the lung function in several ways. In this paper, we explore the adverse outcome pathway (AOP) that starts when inhaled substances that reach the alveoli inhibit the function of the lung surfactant, and leads to decreased lung function. Lung surfactant covers the inner surface of the alveoli, and regulates the surface tension at the air–liquid interface during breathing. The inhibition of the lung surfactant function leads to alveolar collapse because of the resulting high surface tension at the end of expiration. The collapsed alveoli can be re-opened by inspiration, but this re-opening causes shear stress on cells covering the alveoli. This can damage the alveolar-capillary membrane integrity, allowing blood components to enter the alveolar airspace. Blood components, such as albumin, can interact with the lung surfactant and further inhibit its function. The collapse of the alveoli is responsible for a decrease in the surface area available for blood oxygenation, and it reduces the volume of air that can be inhaled and exhaled. These different key events lead to decreased lung function, characterized by clinical signs of respiratory toxicity and reduced blood oxygenation. Here we present the weight of evidence that supports the AOP, and we give an overview of the methods available in vitro and in vivo to measure each key event of the pathway, and how this AOP can potentially be used in screening for inhalation toxicity.