The socially optimal price refers to the price level that maximizes social welfare or overall societal well-being. It takes into account both consumer and producer surplus.
Related terms
Externality: An externality occurs when the production or consumption of a good affects third parties not involved in the transaction. For example, pollution caused by a factory impacting nearby residents.
Market Failure: Market failure refers to situations where an unregulated market fails to allocate resources efficiently, leading to suboptimal outcomes. It can occur due to externalities or other factors.
Deadweight Loss: Deadweight loss represents the inefficiency in an economy caused by market distortions, such as taxes or monopolies. It reflects lost potential welfare that could have been gained with efficient allocation.