In the context of market failures, the difference between the marginal private cost and the marginal social cost is referred to as _____, which often leads to inefficient allocation of resources.

In the context of market failures, the difference between the marginal private cost and the marginal social cost is referred to as external cost. This happens when a business or individual does not bear the full cost of their actions, which can lead to overproduction or overconsumption of goods that harm society. For example, if a factory pollutes a river, the factory’s private costs only include production expenses, while the social costs also include the damage to the environment and public health. Because the factory does not pay for this pollution, it may produce more than what is socially optimal. This misalignment creates inefficiencies in the market, as resources are not allocated in a way that benefits everyone.