Final answer:
The socially optimal output level is less than the market equilibrium quantity when negative externalities are present since the social costs of production are not reflected in the market price, leading to overproduction and a deadweight loss to society.
Step-by-step explanation:
About externalities, the socially optimal output level is generally less than the market equilibrium quantity when negative externalities, such as pollution, are present. This is because the market fails to account for the external costs imposed on society, which leads to overproduction. When social costs are accounted for, the resulting equilibrium will reflect the true cost of production, including externalities, resulting in a higher price and a lower quantity of production. Reflecting on the given example, with a negative externality of pollution, the market output has social costs that exceed the social benefits, indicating that too much product is produced at the market equilibrium.
For instance, in the case of cigarette smoking, without laws banning smoking in public, the private market price (Pm) and quantity (Qm) do not account for the negative externality from second-hand smoke. Once the external costs are considered, the socially optimal output and price (Pe and Qe) will be identified, and it will be shown that the market quantity is greater than the socially optimal quantity, illustrating a market failure. This discrepancy results in a deadweight loss to society, the region where social costs exceed social benefits.