3. The effect of negative externalities on the optimal quantityof consumption Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of bolts imposes a constant external cost of $525 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $525 per ton. 1500 1350 Social Cost 1200 1050 900 Supply (Private Cost) 600 450 Demand 300 (Private Value) 150 3 QUANTITY (Tons of bolts) The market equilibrium quantity is tons of bolts, but the socially optimal quantity of bolt production is tons. To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a per ton of bolts. PRICE(Dollars perton of bolts)

3. The effect of negative externalities on the optimal quantityof consumption Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of bolts imposes a constant external cost of $525 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $525 per ton. 1500 1350 Social Cost 1200 1050 900 Supply (Private Cost) 600 450 Demand 300 (Private Value) 150 3 QUANTITY (Tons of bolts) The market equilibrium quantity is tons of bolts, but the socially optimal quantity of bolt production is tons. To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a per ton of bolts. PRICE(Dollars perton of bolts)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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