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 tonne of paper imposes a constant external cost of $105 per tonne. 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 $105 per tonne. PRICE (Dollars per tonne of paper) 700 630 560 490 420 350 280 210 140 70 0 0 O◇ 1 O e O 3 O Q O Q 2 5 QUANTITY (Tonnes of paper) Supply (Private Cost) Demand (Private Value) 7 Social Cost The market equilibrium quantity is 3.5 tonnes of paper, but the socially optimal quantity of paper production is 3 To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a tonne of paper. tax tonnes. of S per

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 tonne of paper imposes a constant external cost of $105 per tonne. 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 $105 per tonne. PRICE (Dollars per tonne of paper) 700 630 560 490 420 350 280 210 140 70 0 0 O◇ 1 O e O 3 O Q O Q 2 5 QUANTITY (Tonnes of paper) Supply (Private Cost) Demand (Private Value) 7 Social Cost The market equilibrium quantity is 3.5 tonnes of paper, but the socially optimal quantity of paper production is 3 To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a tonne of paper. tax tonnes. of S per

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 2PA

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Concept explainers

Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.

Question

2. 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 tonne of paper imposes a constant external cost of $105 per tonne. 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 $105 per tonne.
(?)
paper)
PRICE (Dollars per tonne
700
630
560
490
420
350
280
210
140
70
0
0
◇
1
0
2
O
3
e
O
O
The market equilibrium quantity is 3.5
O
QUANTITY (Tonnes of paper)
D Supply
(Private Cost)
Demand
(Private Value)
7
Social Cost
tonnes of paper, but the socially optimal quantity of paper production is 3
To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a tax
tonne of paper.
tonnes.
per

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