Because the external cost is not factored into pricing and output decisions in the market, there tends to be over-production of the good or service that has a negative externality attached to it. For example, pollution is a negative externality. The external cost of the pollution, however, is not considered by the market because the buyers and sellers of the product whose production causes the pollution will be the only parties that will determine output levels.

A socially optimal level of production is the level that results when all external costs and benefits are factored into the decision. An "optimal" extraction rate of a natural resource is the extraction rate that accounts for the negative externalities that are generated by the extraction of that resource. This optimal output level, however, is a short-term decision, and not necessarily a long-term one. If the resource is being extracted at a faster rate that it is replenished, it will eventually become fully extracted, causing the resource to eventually run out. This would not be fair for future generations, which is why alternatives to the natural resources must always be searched for.