A factory produces widgets, and while its production increases profits for the owner, it also leads to pollution that affects nearby residents. If the factory management decides to increase production without considering the environmental impact, which of the following best describes the situation regarding social welfare?

The factory’s higher output raises the owner’s profit, but the pollution it creates imposes costs on residents that the owner does not pay for. Because the factory ignores those costs, it produces more than the socially optimal level. This over‑production creates a dead‑weight loss that reduces overall social welfare. In short, the situation is an example of a negative externality that pulls private and social optima apart. A simple illustration is a factory that makes 100 widgets for profit while the surrounding community suffers from air pollution that lowers their quality of life.