If the production of a good generates an external cost to the producer and the producer is not required to factor these costs into his decision making then: a

Option A is correct. External costs are costs imposed on third parties who are not buyers or sellers of a good or service. For example, in case of electricity production with coal, the pollution the factories produce are external costs. Pollution affects people who are living close to the factor. These people may not be the buyer of electricity, however pollution affects adversely the well-being of these people.Hence, external costs present a challenge to the society, especially if the producer is not required to factor these costs into his decision making. If the producer took the responsibility of the external costs, his costs would raise without providing him with significant direct benefits and the increase in costs would reduce the total production. The total production would be fall, since an increase in costs would decrease the total supply to the industry. Therefore, if producer is not required to factor these external costs into his decision making, then the market will overproduce the good.