utility. If no externalities existed, private costs would be the same as the costs to society as a whole, and private

benefits would be the same as the benefits to society as a whole. Thus, if no externalities existed, the
286 12 • Environmental Protection and Negative Externalities

interaction of demand and supply will coordinate social costs and benefits.

However, when the externality of pollution exists, the supply curve no longer represents all social costs.

Because externalities represent a case where markets no longer consider all social costs, but only some of

them, economists commonly refer to externalities as an example of market failure. When there is market

failure, the private market fails to achieve efficient output, because either firms do not account for all costs

incurred in the production of output and/or consumers do not account for all benefits obtained (a positive
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