Consider an imperfectly competitive firm which generates a negative externality. SMC > PMC because of the social costs imposed by the externality.

   The firm maximizes profits by producing where MR = PMC, for output of Q* and price P*. The allocatively efficient amount is found where SMC = D, giving output of QAE at price PAE. If it were perfectly competitive it would produce QPC at price PPC. The firm overproduces relative to allocative efficiency, but it would overproduce by much more if perfectly competitive.

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