Final answer:
Air pollution from a paper mill is a negative production externality, imposing additional costs on society that the paper mill does not fully account for in its production decisions.
Step-by-step explanation:
Negative production externality: When a firm's production reduces the well-being of others who are not compensated by the firm. Private marginal cost (PMC): The direct cost to producers of producing an. additional unit of a good. Marginal Damage (MD): Any additional costs associated with the. Air pollution generated by a paper mill factory is an example of a negative production externality. A negative production externality occurs when a firm's production processes cause harm or impose additional costs on third parties, which in this case would be the broader society that is impacted by the air pollution.
The pollution is a negative spillover effect because the social costs include not only the private costs of the paper mill's operation but also the detrimental effects of pollution that are passed on to society, such as health problems and environmental degradation. These costs are not factored into the product's market price and therefore lead to an overproduction of the goods causing the pollution.