It means that there are costly side effects that selfish agents don't factor into their decisions. With negative externalities, the social benefits curve will lie below the demand curve. E. Social optimum is at the intersection of the social benefits curve and the supply curve, but market equilibrium is at the intersection of the demand curve and the supply curve. F. Economists call this a market failure , since self-interested behavior leads to inefficient results.
People value better air, but polluters normally have no incentive to care.
There is no feasible way to exclude non-payers from the cleaner air. Since you do not have to pay to use it, selfish people will not pay to use it. Positive Externalities A. Positive externalities are the other side of the coin. Positive externalities are beneficial side effects that selfish agents don't factor into their decisions. Draw a social benefits curve above the demand curve.