In figure, if the firm is producing output, is there any external cost being generated? If so, why is this output level called a social optimum? Would it not be optimal to have no external cost? At what level of output would that occur? Does our earlier discussion that characterized any social optimum as the point at which (social) marginal cost equals (social) marginal benefit provide any guidance? Is the point at which social marginal cost and social marginal benefit are equal consistent with the existence of some external cost? Why or whynot?

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SMC PMC St Po