Consider a perfectly competitive firm which generates a positive externality (an example might be a flower grower which produces beauty for passersby and pollen for bee keeper's bees as a by-product). SMC < PMC because the positive externality generates social benefits for which the firm isn't compensated.

    The firm produces QPC, where PMC = P. Allocative efficiency would be achieved where SMC = P and output would be QAE, so the firm underproduces relative to social efficiency since it doesn't receive compensation or benefit for the positive externalities it generates.

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