If a market operates at a quantity where the marginal social cost exceeds the marginal social benefit, what underlying issue is likely causing this misallocation of resources?

When a market operates where the marginal social cost is greater than the marginal social benefit, it means that the costs to society of producing one more unit of a good are higher than the benefits that society receives from that unit. This situation often arises due to externalities, which are costs or benefits that affect third parties not directly involved in a transaction. For example, if a factory pollutes the air while producing goods, the additional health costs for nearby residents are not reflected in the factory's prices. As a result, the factory may produce too much of the good, leading to overproduction and wasted resources. This misallocation occurs because the market fails to consider the full impact of production on society, suggesting a need for regulation or intervention to align social costs and benefits.