What is the relationship between socially optimal output and actual output when negative externalities are present?

When negative externalities are present, the actual output of a good or service is often higher than the socially optimal output. Negative externalities happen when the production or consumption of a product causes harm to others who are not directly involved, like pollution from a factory affecting nearby residents. In such cases, the cost of the harm is not reflected in the price of the product, leading to overproduction. For example, if a factory produces steel and pollutes the air, the factory benefits from selling more steel, but the community suffers from health issues and environmental damage. The socially optimal output is where the total benefits to society, including the costs of the externalities, are maximized, which means producing less than the actual output to reduce the negative effects.