Which of the following is an example of market failure that demonstrates the concept of externalities in the real world?

Market failure occurs when the allocation of goods and services is not efficient, and one common reason for this is externalities. An externality is a situation where a third party is affected by the actions of others, often without compensation. A clear example of this is pollution from a factory; when the factory produces goods, it might release harmful smoke into the air. While the factory benefits from selling its products, nearby residents suffer from poor air quality, leading to health issues. This situation shows how the factory's actions create costs for others, illustrating market failure because the true cost of production is not reflected in the price of the goods.