Many microbes cooperatively secrete extracellular products that favorably modify their environment. Consistent with social evolution theory, structured habitats play a role in maintaining these traits in microbial model systems, by localizing the benefits and separating strains that invest in these products from ‘cheater’ strains that benefit without paying the cost. It is thus surprising that many unicellular, well-mixed microalgal populations invest in extracellular toxins that confer ecological benefits upon the entire population, for example, by eliminating nutrient competitors (allelopathy). Here we test the hypotheses that microalgal exotoxins are (1) exploitable public goods that benefit all cells, regardless of investment, or (2) non-exploitable private goods involved in cell-level functions. We test these hypotheses with high-toxicity (TOX+) and low-toxicity (TOX-) strains of the damaging, mixotrophic microalga Prymnesium parvum and two common competitors: green algae and diatoms. TOX+ actually benefits from dense populations of competing green algae, which can also be prey for P. parvum, yielding a relative fitness advantage over coexisting TOX-. However, with non-prey competitors (diatoms), TOX- increases in frequency over TOX+, despite benefiting from the exclusion of diatoms by TOX+. An evolutionary unstable, ecologically devastating public good may emerge from traits selected at lower levels expressed in novel environments.