Which of the following scenarios best illustrates a market failure due to external costs that affect the social cost of producing a particular good?

A market failure caused by external costs happens when the price a producer pays does not include the damage done to others. In this case, a factory that makes plastic bottles emits air pollution that harms the lungs of people living nearby, but the factory’s cost only reflects its own production expenses. Because the factory does not pay for the health costs it creates, it produces more than the socially optimal amount. Thus the scenario where a factory’s pollution imposes health costs on surrounding residents best illustrates a market failure due to external costs. The social cost is the sum of the factory’s private cost and the additional health costs borne by the community.