What are the ways externalities may prevent market equilibrium and the various government policies used to remedy the inefficiencies in markets caused by externalities?

Products with negative externalities are overproduced as people demand too much of them without realizing the external costs. On the other hand, products with positive externalities are underproduced as people demand too little of them without realizing the external benefits.

Due to this overproduction and underproduction, the economically efficient equilibrium cannot be reached.

In the case of products with negative production externalities, the government can ask producers to become responsible for the external costs. This would shift the supply curve to the left reducing the quantity supplied. In the case of products with negative consumption externalities, measures need to be taken to move the demand curve to the left. For example, making consumers aware of the harm they are causing to others.

In the case of products with positive externality, subsidies can be given to increase supply. Consumers can be made aware of the positive effects on others of the product to shift the demand curve to the right and increase the quantity supplied.