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 extenal cost of $150 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 $150 per ton. 500 450 Social Cost 400 350 300 Supply (Private Cost) 250 200 Demand 150 (Private Value) 100 50 1 QUANTITY (Tons of bolts) The market equilibrium quantity is tons of bolts, but the socially optimal quantity of bolt production is tons. PRICE(Dollars perton of bolts)

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 extenal cost of $150 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 $150 per ton. 500 450 Social Cost 400 350 300 Supply (Private Cost) 250 200 Demand 150 (Private Value) 100 50 1 QUANTITY (Tons of bolts) The market equilibrium quantity is tons of bolts, but the socially optimal quantity of bolt production is tons. 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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