These occur when the actions taken by firms or consumers impose costs or confer benefits on others that are not involved in the transaction. Private producers and consumers make decisions about production and consumption based on private marginal cost and market price. When they neglect to take into account social costs, the market outcome leads to a price that does not reflect social cost thus the market fails to achieve the allocatively efficient outcome. The consumer whose decision about how much household waste to have a garbage company collect. When social costs exceed private costs, a negative externality is said to exist.
Negative externalities are harmful.
Too much output is produced by the individual firms. Too much output is produced in the market as a whole at too low a price. Private decision makers make decisions based on private benefits. When they fail to take into account social benefits, the market outcome is not the efficient outcome. When social benefits exceed private benefits a positive externality is said to exist.