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 $210 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 $210 per ton. PRICE (Dollars per ton of paper) 700 630 560 490 420 350 280 210 140 70 0 0 O ☐ O 2 3 O 4 5 QUANTITY (Tons of paper) The market equilibrium quantity is ☐ O ☐ Supply (Private Cost) 6 Demand (Private Value) 7 Social Cost tons of paper, but the socially optimal quantity of paper production is To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a of paper. tons. $ per ton

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5. 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 $210 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 $210 per ton.
PRICE (Dollars per ton of paper)
700
630
560
490
420
350
280
210
140
70
0
0
¶¶
1
O
2
O
3
4
5
QUANTITY (Tons of paper)
The market equilibrium quantity is
0
☐ Supply
(Private Cost)
6
Demand
(Private Value)
7
Social Cost
?
tons of paper, but the socially optimal quantity of paper production is
To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a
of paper.
tons.
per ton
Transcribed Image Text:5. 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 $210 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 $210 per ton. PRICE (Dollars per ton of paper) 700 630 560 490 420 350 280 210 140 70 0 0 ¶¶ 1 O 2 O 3 4 5 QUANTITY (Tons of paper) The market equilibrium quantity is 0 ☐ Supply (Private Cost) 6 Demand (Private Value) 7 Social Cost ? tons of paper, but the socially optimal quantity of paper production is To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a of paper. tons. per ton
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