When a firm imposes an external social cost, the government should impose a tax exactly equal to the marginal social cost to ensure that the efficient level of output will be produced.

Marginal Social Cost

The total cost to society of producing an additional unit of a good or service, including both private costs and external effects.

External Social Cost

Costs of production or consumption that affect individuals not involved in the transaction, often unaccounted for by the market price.

Efficient Level

Describes a state where resources are allocated in the most effective manner, maximizing output and outcomes.