MARKET FAILURE: EXTERNALITIES
You may recall from economics class that we presume firms, by design, seek to maximize their own welfare at society's expense. Unfortunately, environmentally sound practices are generally not advantageous to profit-maximizing firms, which often reduce costs by engaging in behavior that pollutes more heavily. Many firms typically do not take external costs like environmental harm into consideration when making decisions, since society bears these costs and they do not directly affect a firm's revenues or expenses. If a power plant can produce energy most profitably by burning coal instead of using expensive technologies to reduce harmful emissions, it has an economic incentive to continue burning coal. Because the market fails to consider external costs, we need other approaches to encourage "green" business practices, including many discussed in this chapter.

Source: Bradley R. Schiller, The Economy Today (New York: McGraw-Hill/Irwin, 2006), pp. 602–603.