How do externalities actually create market failure?

Market failure is the misallocation of resources by the price mechanism.
I know the idea of externalities but how exactly do externalities create market failure. My book says something regarding how prices don't reflect the costs and benefits to society.

Can anyone explain this please? Also what else is there to externalities, I've learnt the production/consumption diagrams and the policies that can combat externalities. But should I know the diagrams for each policy?

Cheers

Externalities are defined as third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.
Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption.

Give this article a read, it basically outlines why they create market failure.

Basically, if you want a quick answer, externalities mean that the producer does not bear all the costs, or buyer does not get all the benefits of the good. Which means that market equilibrium which maximizes the difference between buyer's benefit and producer's cost will not maximize the difference between true benefits and costs.
Specifically, if there is positive externality, market will produce too little, and if negative - too much.

I have a YouTube channel with lots of tutorials on things like this, you might find it useful!

Alex

How are they different to merit and demerit goods? As merit goods are defined as goods which yield positive externalities and so are underproduced.

Merit and demerit goods are basically the same positive and negative externalities. So look back at my reply and change positive and negative externalities to merit and demerit goods, if it helps your understanding