Market Failures: Externalities e When a market outcome affects parties other than the buyers and sellers in the market side-effects are created called externalities e Externalities cause markets to be inefficient and thus fail to maximize total surplus H arc Inc items and derived items copyright o 2001 by Harcourt, IncHarcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Market Failures: Externalities uWhen a market outcome affects parties other than the buyers and sellers in the market, side-effects are created called externalities. uExternalities cause markets to be inefficient, and thus fail to maximize total surplus