When firms in an industry have fully internalized a production externality,

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When firms in an industry have fully internalized a production externality, they bear the entire social marginal cost of production. This means that they are taking into account the costs imposed on society as a whole and are adjusting their production accordingly. This leads to allocative efficiency, where the market equilibrium quantity is equal to the socially optimal quantity. Therefore, they are not producing at more than the optimal level of output (A) or less than the optimal level of output (E). The marginal social cost may not necessarily be zero (B) and it is possible to achieve allocative efficiency (C).

When Firms in an Industry Have Fully Internalized a Production