The output level that reflects all the costs and benefits associated with a transaction i.e. it is the equilibrium that would be achieved if the market outcome reflects the effect of externalities.
Below is a diagram which shows a market that previously had negative production externalities in and ultimately a tax equal to the size of the divergence between the marginal private and social cost curves has removed the excessive production of this externality onto third parties. As a result the socially optimal level of output reached. This can only occur in a market with externalites if the marginal private and social curves are equal to each other for both the benefits and the costs.
