What effect does a negative externality have on private market output levels?

A negative externality occurs when a third party suffers costs from a transaction they are not a part of; this usually happens when the production or consumption of a good or service imposes costs on others. In the presence of a negative externality, producers do not take the full costs of their actions into consideration, leading them to produce more than what is socially optimal.

When firms do not account for the negative externality, such as pollution from industrial production, they will produce at a higher level than what would be considered economically efficient. This results in an output level that exceeds the socially optimal output level because the firm is focusing solely on its private benefits without fully capturing the external costs imposed on society.

Thus, the correct answer reflects the understanding that negative externalities lead to a misallocation of resources, where the market fails to regulate itself effectively, resulting in overproduction relative to the efficient output level. In summary, negative externalities cause market output to exceed the economically efficient output because the external costs are not incorporated into the production decisions of the firms.