Which of the following is an example (does not have to be realistic) of a negative production externality? a

A. Pollution

Reason: The production decision by a firm undertaking production of a good which results in pollution emission not only involves the marginal cost of producing the output but also involves the external cost incurred by the society as a whole due to decreased levels of air quality. This poor air quality adversely impacts the health of individuals and results in environmental degradation, which impacts all forms of living beings. This external cost generated from the production process makes the social cost of production of the good far greater than its marginal private costs of making the good. Hence pollution is an example of negative externality.