2 3. The effect of negative externalities on the optimal quantityof consumptionConsider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality forthose living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $105 per ton. The following graphshows 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 $105 per ton.PRICE (Dollars per ton of steel)70063056049042035028021014070001O2O■+3☐O☐54QUANTITY (Tons of steel)☐ Supply6(Private Cost)Demand(Private Value)7Social Cost(?) The market equilibrium quantity istons of steel, but the socially optimal quantity of steel production istons.To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose aof steel.of $per ton

The social cost curve will be $105 higher for each price above the Private cost curve.

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 of steel. of $ per tom

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 of steel. of $ per tom

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter17: Externalities And The Environment

Section: Chapter Questions

Problem 2.3P: (Negative Externalities) Suppose you wish to reduce a negative externality by imposing a tax on the...

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Question

3. The effect of negative externalities on the optimal quantityof consumption
Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality for
those living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $105 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 $105 per ton.
PRICE (Dollars per ton of steel)
700
630
560
490
420
350
280
210
140
70
0
0
1
O
2
O
■
+
3
☐
O
☐
5
4
QUANTITY (Tons of steel)
☐ Supply
6
(Private Cost)
Demand
(Private Value)
7
Social Cost
(?)

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
of steel.
of $
per ton

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