I was on a flight Saturday. The man in front of me reclined his seat back to an extent that it slightly restricted my leg room. This seemed like an externality. The actions of this man reduced one of the goods, comfort, in my utility function.
It would have been very easy for me to attempt to remedy this situation. I could have politely asked the man to lean his seat forward a bit. If that failed, I could have called the flight attendant over to force him to lean his seat forward. I found that option a bit extravagant given the circumstances so we're left with the two of us bargaining over his optimal seat position should I raise a fuss. This man obviously valued having his seat reclined in order to increase his comfort, or possibly annoy me (probably not the latter, but it is a possibility). I valued having as much leg room as possible, but maximizing that would result in the cost of bargaining with the man. I did not bargain with him, his seat remained reclined for the remainder of the flight, and I continued to work.
Given that my net benefits of increased leg room (additional leg room minus the cost of bargaining) was obviously less than the value this man placed on reclining in his seat, social value was maximized. What appeared to be an externality was willingly accepted by me because the cost of remedying the situation was higher than the additional leg room I would obtain.
Now, the 12 year old boy sitting between myself and the attractive young lady in the next seat was an externality that should have been remedied immediately! I'm sure a meager cash payment would have eliminated that externality and added to both our utilities. However, she might have incurred an externality and then the whole process would start over.