Why does social optimality occur where SMB equals MSC?

• A. Because SMB equals PMB and MSC equals PMC.
• B. Because total private benefits equal total private costs.
• C. Because total private benefits plus external benefits equal total private costs plus external costs.
• D. Because private costs are zero.

Answer: (C)

The key idea is that social optimality is reached when the extra benefit to society from one more unit equals the extra cost to society of producing that unit. When externalities exist, the social marginal benefit is the private marginal benefit plus any external benefit, and the social marginal cost is the private marginal cost plus any external cost. If SMB equals MSC, the last unit adds no net social welfare, so producing more or less would reduce total welfare. That equality can be expressed in totals as private benefits plus external benefits equal private costs plus external costs, which is why that statement correctly captures the condition for efficiency. If you ignore external effects, or assume private totals alone balance costs, you don’t reflect the full social picture, and the condition wouldn’t guarantee efficiency.