3. The effect of negative externalities on the optimal quantity of consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $240. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $240 per unit. PRICE (Dollars per unit of electric cars) 800 720 640 560 480 400 320 240 160 80 0 0 ☐ 1 D O O 2 3 4 5 QUANTITY (Units of electric cars) ☐ 6 Supply (Private Cost) Demand (Private Value) 7 Social Cost ? The market equilibrium quantity is 4.5 units of electric cars, but the socially optimal quantity of electric car production is 3.5 units. To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a tax per unit of electric cars. ▼ of $240

3. The effect of negative externalities on the optimal quantity of consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $240. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $240 per unit. PRICE (Dollars per unit of electric cars) 800 720 640 560 480 400 320 240 160 80 0 0 ☐ 1 D O O 2 3 4 5 QUANTITY (Units of electric cars) ☐ 6 Supply (Private Cost) Demand (Private Value) 7 Social Cost ? The market equilibrium quantity is 4.5 units of electric cars, but the socially optimal quantity of electric car production is 3.5 units. To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a tax per unit of electric cars. ▼ of $240

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 2PA

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