Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative extenality for those living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $210 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for steel. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $210 per ton. 700 630 Social Cost 490 420 350 Supply (Private Cost) 280 Demand (Private Value) 210 140 70 2. QUANTITY (Tons of steel) The market equilibrium quantity is tons of steel, but the socially optimal quantity of steel production is tons. To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose a per ton PRICE (Dollars per ton of steel)

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