In externality graphs, the gap between the marginal private cost (MPC) and the marginal social cost (MSC) represents the degree of _______ caused by the production, highlighting the need for government intervention to correct market failure.

In externality graphs, the gap between the marginal private cost (MPC) and the marginal social cost (MSC) represents the degree of negative externality caused by the production. A negative externality occurs when the production of a good leads to harmful effects on others who are not involved in the transaction, like pollution from a factory affecting nearby residents. For example, if a factory produces goods and emits smoke, the factory only considers its own costs (MPC) but ignores the health problems and environmental damage it causes to the community (MSC). This gap shows that the true cost of production is higher than what the factory accounts for, indicating a market failure. To correct this issue, government intervention, such as taxes or regulations, may be needed to align private costs with social costs, ensuring a fairer outcome for everyone.