Take a closer look: that curve is shifting left because they are starting to include the external costs that are included in the production of that good. When those external costs are not counted (as they are not at s1) you can see that output is more than when we account for those costs. See where they labeled "ideal output" vs "actual price and output." Good question. See me in person if this doesn't make sense.
Chapter 5 Curiosities
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