Externalities:

Externalities implies inadequate expression of costs or benefits in prices and economic decision-making. There are several examples of externalities, both positive and negative, around us. In all the cases there is no incentive on the part of the economic agent to restrict his/her equilibrium production/consumption to the socially optimum level. In the presence of externalities the economy produces less of what it should produce and more of what should not produce! For goods with positive externalities social benefit is higher than private benefit. Thus social optimum is at a higher level than the equilibrium achieved on the basis of private benefit. On the other hand, for goods involving negative externalities private cost is lower than social cost. Thus equilibrium realized on the basis of private cost is higher than social optimum.