A negative externality or spillover cost occurs when:

• A. the social benefit of production exceeds the private benefit
• B. the social cost of production exceeds the private cost
• C. the private benefit of consumption exceeds the social benefit
• D. the private cost of production exceeds the social cost

Answer: (B)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when the actions of individuals or firms have effects on third parties that are not reflected in market prices.
2. Distinguish between private and social costs/benefits: Private cost or benefit refers to the cost or benefit borne by the producer or consumer directly involved, while social cost or benefit includes both private and external costs or benefits affecting society as a whole.
3. Identify what a negative externality means: A negative externality (or spillover cost) happens when the social cost of production or consumption is greater than the private cost, meaning there are additional costs imposed on others that are not accounted for by the producer or consumer.
4. Analyze the options given: The correct description of a negative externality is when the social cost of production exceeds the private cost, indicating that the external costs are not included in the private cost.
5. Conclude that the correct answer is: 'the social cost of production exceeds the private cost' because this captures the essence of a negative externality where external costs cause market failure.