Upon graduation, you realize you have three options: you can take a job as a computer programmer, take a job as a coal miner, or remain unemployed and play video games all day. As a computer programmer, you would create value of $2,000 per week for your employer, and receive disutility of $1,000 per week relative to playing video games. (To put it another way, at a wage of $1,000 a week, you would be exactly indifferent between taking the programming job and staying home.)
As a coal miner, you would create value of $3,000 per week, and receive disutility of $1,800 a week (mining coal is less fun than an office job, which is still less fun than playing video games).
What is the efficient use of your time?
Assume that both the programming and coal mining industries are perfectly competitive when it comes to hiring, so either firm would offer you a wage equal to the value they get from you. Which job would you end up taking?
Now suppose that mining coal also creates an externality. If you work as a coal miner, more coal gets dug up and eventually burned, leading to more pollution. Suppose that the total externality associated with you working as a coal miner is $400 per week, and is spread over a large number of people. (In particular, the coal company does not have to pay for it.)
What is the efficient use of your time?
If you are perfectly rational and selfish, which job will you end up taking?