In the case of negative externalities in production, the firm's production costs: a. exceed the external costs. b. equal the external costs. c. overstate the true cost of producing the product. d. understate the true cost of producing the product.

In the case of negative externalities in production, the firm's production costs: **d. understate the true cost of producing the product.** ### Explanation: Negative externalities occur when a firm's production imposes costs on third parties that are not reflected in the firm's production costs. For example, if a factory pollutes the air while producing goods, the health costs and environmental damage affect the community but are not included in the factory's cost of production. As a result, the firm's costs do not account for these external costs, leading to an understatement of the true cost of production. The firm may produce more than the socially optimal level of output because it does not bear the full costs of its production activities.