Externalities distort the supply and demand curve, instead of the supplier bearing the full costs and benefits of an externality like pollution (the optimum price), the market pays an artificially high or low equilibrium price.

What are the effects of externalities?

Externalities will generally cause competitive markets to behave inefficiently from a social perspective. Externalities create a market failure—that is, a competitive market does not yield the socially efficient outcome. Education is viewed as creating an important positive externality.

Who does externality effect?

Examples. Externalities may arise between producers, between consumers or between consumers and producers. Externalities can be negative when the action of one party imposes costs on another, or positive when the action of one party benefits another.