A factory emits pollution affecting local communities. How should this negative externality impact the factory's production decisions to achieve market efficiency?

When a factory emits pollution, it creates a negative externality because it harms the health and environment of nearby communities without paying for that damage. This means the factory's production costs do not include the costs it imposes on others, leading to overproduction of goods and inefficient market outcomes. To achieve market efficiency, the factory should consider these external costs in its decision-making. For example, if the pollution causes health issues that lead to increased medical costs for local residents, the factory might need to invest in cleaner technology or pay a tax for its emissions. By internalizing these costs, the factory can reduce pollution, improve community well-being, and find a balance between production and environmental responsibility.