If an industry produces an allocatively efficient level of output, then for the last unit of output produced the marginal benefit to society equals marginal cost. In fact, allocatively efficient actually means that the Social Marginal Benefit = Social Marginal Cost or SMB = SMC. But how do we go from marginal benefit and marginal cost to Social Marginal Benefit and Social Marginal Cost?

Some products may generate significant social harm by their production or use. Examples might include tobacco, alcohol, improperly tested prescription drugs, weapons, goods whose production generates large amounts of pollution, and so on. While we must be intensely aware of these possibilities, for now let's put them aside. We will address these concerns later in this section and again in the Public Economics and Externalities sections.

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