5. The effect of external costs on the efficient level 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 $175 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 $175 per ton. PRICE (Dollars per ton of paper) 500 450 400 350 300 250 200 150 100 50 0 0 2 3 оп 4 Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Tons of paper) Social Cost ? The market equilibrium quantity is 5 tons of paper, but the socially optimal quantity of paper production is 3.5 tons.
5. The effect of external costs on the efficient level 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 $175 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 $175 per ton. PRICE (Dollars per ton of paper) 500 450 400 350 300 250 200 150 100 50 0 0 2 3 оп 4 Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Tons of paper) Social Cost ? The market equilibrium quantity is 5 tons of paper, but the socially optimal quantity of paper production is 3.5 tons.
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Transcribed Image Text:5. The effect of external costs on the efficient level
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 $175 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 $175 per ton.
PRICE (Dollars per ton of paper)
500
450
400
350
300
250
200
150
100
50
0
0
2
3
оп
4
Supply
(Private Cost)
Demand
(Private Value)
5
6
7
QUANTITY (Tons of paper)
Social Cost
?
The market equilibrium quantity is 5 tons of paper, but the socially optimal quantity of paper production is 3.5
tons.
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