When the social costs of production are able to be passed on to the consumers or to society, polluters are given an incentive to overproduce their product without facing many financial consequences.
These producers are not required to bear the full cost of production. They are thus able to meet or exceed the demand for the product and to receive a profit while keeping their marginal private costs relatively low. As shown in the graphic below, it would be advantageous for producers to operate products at the highest price and production rate; this causes a reduction in marginal social benefits but a rise in marginal social costs for the resources used to make the product.
When companies are faced with negative financial effects directly or indirectly related to pollution, they are given an incentive to under produce their own products or services to minimize their marginal private cost.
As with overproduction, this comes at a cost to the consumer but in the opposite direction; supply for the product or service is not met and tends to stay at a level below what would be ideal for the consumers. Basically, as shown in the graphic below, consumers are paying more for less to cover the costs of production. By not producing optimal levels of the product and charging a high price for what is produced, the company still receives its profit and keeps the marginal private cost low.
The sentiment of completely wiping out pollution is a common and noble reaction to what many of us see as a never-ending problem. However, it is often forgotten that such endeavors are not without their costs. A water-treatment facility, for example, incurs the cost of ensuring that a population's water supply is sufficiently filtered and made potable for consumption.
If the treatment plant has the added burden of cleaning waste pollution from surrounding factories, then its cleanup costs will increase proportionate to the amount of pollution that is has to neutralize. Once the treatment exceeds a certain point in its cleanup endeavors, the costs may begin to outweigh the benefits. For the treatment plant to bankrupt itself in its cleaning efforts would not be beneficial to the plant or its many customers.
This is true of pollution in general. There is no doubt that many, if not all, people would like to eradicate it. Initially, reducing the amount of pollution increases social well being and over time, reduces marginal social cost. However, to mindlessly continue to spend money on cleaning up pollution would eventually cause the marginal social cost to increase beyond the marginal social benefit. This is the opposite of what we want to happen by reducing pollution.
The ideal goal for pollution control would be to reduce pollution levels to a point that is as close as possible to equilibrium between the marginal social cost and the marginal social benefit.