3. The effect of negative externalities on the optimal quantityof consumption Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of paper imposes a constant external cost of $315 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for paper. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $315 per ton.

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3. The effect of negative externalities on the optimal quantityof consumption
Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living
downstream from the factory. Producing an additional ton of paper imposes a constant external cost of $315 per ton. The following graph shows the
demand (private value) curve and the supply (private cost) curve for paper.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $315 per ton.
(?
900
810
Social Cost
720
630
540
450
Supply
(Private Cost)
360
270
Demand
180
(Private Value)
90
1
2
6
QUANTITY (Tons of paper)
The market equilibrium quantity is
v tons of paper, but the socially optimal quantity of paper production is
v tons.
To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a
of S
per ton
of paper.
PRICE (Dollars perton of paper)
Transcribed Image Text:3. The effect of negative externalities on the optimal quantityof consumption Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of paper imposes a constant external cost of $315 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for paper. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $315 per ton. (? 900 810 Social Cost 720 630 540 450 Supply (Private Cost) 360 270 Demand 180 (Private Value) 90 1 2 6 QUANTITY (Tons of paper) The market equilibrium quantity is v tons of paper, but the socially optimal quantity of paper production is v tons. To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a of S per ton of paper. PRICE (Dollars perton of paper)
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