I think you're tripping up on jargon.

In economics, an "externality" is a consequence to some action which does not affect the actor (or which the actor does not care about). What makes it "external" is that it does not enter the actor's optimization process and thus does not afffect the decisions he is making.

The problems with externalities is that they are a weapon of Moloch, that is, they subvert distributed coordination mechanism like markets. Pollution is a classic externality.

There are ways of dealing with externalities and the two main ones are:

• Direct control by a central authority. If you don't want coal power plants to emit sulfur into the atmosphere, you just make (and enforce) laws which forbid them to do do.

• Changing the rules of the game. If you make it so the externality becomes a cost for the actor -- that is, if you bring it into his optimization process -- the problem disappears "naturally" because it's not an externality any more. One way of doing this is giving the actor some property rights in whatever is worsened by the externality. Another is to make him liable for the problems so that they have costs for him (e.g. via lawsuits).