A negative externality or spillover cost occurs when:

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

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of externalities. Externalities occur when a third party is affected by the production or consumption of a good or service, and these effects are not reflected in market prices.
2. Step 2: Differentiate between private and social costs. Private cost is the cost borne by the producer, while social cost includes both the private cost and any external costs imposed on society.
3. Step 3: Recognize that a negative externality (or spillover cost) means that the social cost is greater than the private cost because the producer does not bear all the costs of production.
4. Step 4: Analyze the options given. The correct condition for a negative externality is when the social cost of production exceeds the private cost, indicating additional costs to society not accounted for by the producer.
5. Step 5: Conclude that the correct answer is: 'the social cost of production exceeds the private cost' because this reflects the presence of a negative externality.