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 $70 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 $70 per ton. 200 180 Social Cost 160 140 Supply (Private Cost) 120 100 80 60 40 Demand 20 (Private Value) 1 3 4 5 6 7 QUANTITY (Tons of paper) The market equilibrium quantity is tons of paper, but the socially optimal quantity of paper production is tons. To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a per ton of paper. PRICE (Dollars per ton of paper)
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 $70 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 $70 per ton. 200 180 Social Cost 160 140 Supply (Private Cost) 120 100 80 60 40 Demand 20 (Private Value) 1 3 4 5 6 7 QUANTITY (Tons of paper) The market equilibrium quantity is tons of paper, but the socially optimal quantity of paper production is tons. To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a per ton of paper. PRICE (Dollars per ton of paper)
Chapter8: Market Failure
Section: Chapter Questions
Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...
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3. The effect of negative externalities on the optimal quantity of 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 $70 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 $70 per ton.
Social Cost01234567200180160140120100806040200PRICE (Dollars per ton of paper)QUANTITY (Tons of paper)Demand(Private Value)Supply(Private Cost)
The market equilibrium quantity is ---- tons of paper, but the socially optimal quantity of paper production is ---- tons.
To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a----- of
per ton of paper. (Please see the screenshot)
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