3. The effect of negative externalities on the optimal quantity of consumption Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $700. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $700 per unit. PRICE (Dollars per unit of pharmaceuticals) 1800 1600 1400 1200 1000 800 600 400 200 • 1 3 QUANTITY (Units of pharmaceuticals) 6 Supply Private Cost) Demand (Private Value) 4 Social Cost The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units. To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a per unit of pharmaceuticals.
3. The effect of negative externalities on the optimal quantity of consumption Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $700. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $700 per unit. PRICE (Dollars per unit of pharmaceuticals) 1800 1600 1400 1200 1000 800 600 400 200 • 1 3 QUANTITY (Units of pharmaceuticals) 6 Supply Private Cost) Demand (Private Value) 4 Social Cost The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units. To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a per unit of pharmaceuticals.
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Transcribed Image Text:3. The effect of negative externalities on the optimal quantityof consumption
Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality
for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $700. The following
graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $700 per unit.
PRICE (Dollars per unit of pharmaceuticals)
2000
1800
1600
1400
1200
1000
800
600
400
200
O
0
D
2
QUANTITY (Units of pharmaceuticals)
6
Supply
(Private Cost)
Demand
(Private Value)
Social Cost
The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units.
To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a
per unit of pharmaceuticals.
of
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