Chapter 10:Externalities

Chapter 10 discussed externalities, which are the uncompensated impacts of a person's actions on the well being of a bystander. When there are externalities, market equilibrium is inefficient because it fails to maximize the total benefit to society as a whole (not just the buyer and seller). To provide efficiency, governments create policies. Governments internalize the externality by moving the allocation of resources closer to the social optimum (though taxing or subsidizing). Activities with a negative externality (adverse impacts on the bystander) are taxed to create a negative incentive. Activities with a positive externality (beneficial impacts on the bystander) are subsidized.
When graphing negative externalities, the private costs of the producers plus bystanders affected adversely are taken into consideration. The social-cost curve is above the supply curve and the difference between the two curves shows the cost of the negative externality. The optimal quantity is where demand intersects the social-cost curve. When graphing positive externalities, the social value is greater than the private value, so the social value curve lies above the demand curve. Optimal quantity is where the social value curve and the supply curve intersect.

I wish we did not skip Chapter 9 because I don't really understand what subsidies are. Also, why do negative externalities affect supply, while positive externalities affect demand?