In a market where a firm produces a good with external costs, how should the firm adjust its output to achieve social optimality?

In a market where a firm produces a good that creates external costs, like pollution, the firm needs to adjust its output to reach social optimality. Social optimality occurs when the total benefits of production equal the total costs, including both private costs and external costs. To achieve this, the firm should reduce its output until the marginal cost of producing one more unit equals the marginal social cost, which includes the external costs. For example, if producing one more unit of a product leads to additional pollution that affects the health of nearby residents, the firm should consider this impact and limit its production to a level that reflects these costs. By doing so, the firm helps ensure that its production is not only profitable but also beneficial to society as a whole.