2.8.1—Socially optimum output

Socially optimum output occurs where social marginal benefit equals social marginal cost, including relevant external benefits or costs.

The market outcome can overproduce a harmful good or underproduce a beneficial one when private incentives omit spillovers.

Compare private and social marginal curves and identify the welfare-maximising quantity.

If pollution adds $2 social cost per unit, social marginal cost lies above private cost and the optimum quantity is lower.

Optimum depends on the objectives, evidence and valuation used.

At $MSB=MSC$, the marginal social gain from the last unit equals its marginal social opportunity cost, so producing more would add more social cost than benefit and producing less would forgo net benefit. Under the model, this quantity is allocatively efficient and maximizes social/community surplus. Do not substitute private demand or supply for MSB or MSC when an externality separates them.