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 $ per to of steel.

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Chapter10: Externalities
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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 $
per ton
of steel.
Transcribed Image Text: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 $ per ton of steel.
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 $165 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 $165 per ton.
1100
990
Social Cost
880
770
Supply
(Private Cost)
660
550
440
330
220
Demand
110
(Private Value)
1
2
4
7
QUANTITY (Tons of steel)
PRICE (Dollars per ton of steel)
Transcribed Image Text: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 $165 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 $165 per ton. 1100 990 Social Cost 880 770 Supply (Private Cost) 660 550 440 330 220 Demand 110 (Private Value) 1 2 4 7 QUANTITY (Tons of steel) PRICE (Dollars per ton of steel)
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