Applying the same question to theft produces the result that if I steal your car and I get more utility out of having your car than you lose by not having it + the utility that you lose from psychological harm due to theft, insurance premiums rising, etc., I can internalize the cost and still come out ahead, so this sort of theft is not in oversupply.

Of course, we normally don't consider the fact that the criminal gains utility to be relevant. Saying that it's not a market failure if the criminal is willing to internalize the cost implies that we consider the gain in the criminal's utility to be relevant.