Externalities can distort market outcomes from "summary" of Economics of the Environment by Robert N. Stavins
The presence of externalities in economic transactions can lead to market outcomes that are different from those that would exist in their absence. Externalities are the costs or benefits that are not reflected in the prices of goods and services. When externalities are present, market prices do not fully reflect the social costs or benefits of production and consumption. Negative externalities occur when the production or consumption of a good or service imposes costs on third parties that are not compensated for. For example, the production of a certain good may result in pollution that harms the health of individuals living nearby. Since the producer does not have to bear the cost of this pollution, they have no incentive to take it into account in their production decisions. This can lead to an overproduction of the good from a social perspective. On the other hand, positive externalities occur when the production or consumption of a good or service benefits third parties that are not compensated for. For example, investing in education not only benefits the individual ...
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