Externalities can distort the true and of goods and services.
incentives, profits
regulations, property rights
costs, benefits

Costs, benefits.

Externalities can distrot the true COSTS and BENEFITS of goods and services.

In production, you only compute for costs and benefits based on their quantifiable value. Externalities are those costs and benefits that cannot be quantified. Thus, they are not considered by the producers in their computations.

Externalities are classified as positive and negative.

An example of positive externality is the knowledge gained in doing R & D about a certain product. Knowledge is can't be quantified but it benefits the society.

An example of negative externality is the pollution generated during production. It can't be quantified by it costs the environment and the people.