The economist's concept of "optimum allocation of resources" is a social optimum. That is, the idea is to maximize the net benefits for everybody in society. 
, regardless of who enjoys the benefits or pays the cost. In the ideal P-competitive economy, this is no problem. Everyone maximizes their private benefit, but since everyone pays for any benefits they receive, and bears only the corresponding costs, the result of this private-benefit maximization is that social net benefits are maximized.
When there are externalities, however, this is no longer true. In maximizing their private net benefits, people will overlook some (external) costs and benefits, and maximization of private benefits will no longer lead to maximization of social net benefits.
Copyright