A factory produces widgets and emits pollution as a byproduct of its production process. Which classification best describes the pollution generated, and why is it categorized this way?

The pollution generated by the factory is classified as a negative externality. This means it is an unintended consequence of the factory's production that affects people who are not directly involved in the production process. For example, if the factory releases smoke that makes the air dirty, nearby residents may suffer from health problems or decreased quality of life without receiving any compensation for this harm. The reason it is called an externality is that the costs of pollution are not reflected in the price of the widgets, so the factory does not bear the full cost of its actions. This can lead to overproduction of widgets and more pollution than is socially acceptable.