Final answer:
A negative externality like pollution causes the supply curve to shift left, as firms produce less due to higher production costs that account for social costs. This results in a market failure where the actual quantity produced exceeds the socially optimal level. Government intervention often corrects this by internalizing the externality, leading to a more accurate supply curve.
Step-by-step explanation:
If companies that took into account an externality want to supply less at any given price compared to the original market supply, it indicates a negative externality, such as the externality of pollution. In this case, the supply curve shifts to the left. This leftward shift represents the fact that, when firms consider the external costs of pollution, which were not previously incorporated into the cost of production, they will supply a smaller quantity at any given price. This is because those external costs make production more expensive, reducing the profit margin. Consequently, the equilibrium quantity produced would decrease, and the price would likely increase, reflecting the true cost of production considering all social costs.
Economists often view this type of scenario, where the market fails to internalize the social costs of production, leading to overproduction, as an example of market failure. To reach an efficient output where social costs and benefits are aligned, the market would need to internalize these externalities, often by government intervention, such as taxation or regulation. In doing so, the supply curve would shift to accurately depict the full social costs, leading to a socially optimal level of production that is lower than the market output in the presence of such externalities.