3. The effect of negative externalities on the optimal quantity of consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge inth a nearbg.r river, creating a negative extemality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $300. The following graph shows the demand [private value} curve and the supply.r [private cost] curve for electric cars. se the purple points (diamond symbol) to plot the social cost curve when the external cost is $300 per unit. 2000 1800 O Social Cost 1600 1400 O Supply 1200 (Private Cost) 1000 PRICE (Dollars per unit of electric cars) 800 600 400 O Demand 200 (Private Value) 7 0 1 2 3 5 QUANTITY (Units of electric cars)E D SIJiJ'Dllr {Private Cost] PRICE (Dollars per unit of electric .h. 8 Demand [Private 1li'alue) re 8 2 a DUANTI W {U 1e market equilibrium quantity is V units of electric cars, but the socially optimal quantity of electric car production is V units. ) create an incentive for the rm to produce the socially.r optimal quantity.r of electric cars, the government could impose a V of- er unit of electric cars. Supply 1.5 1200 (Private Cost) 2 1000 PRICE (Dollars per unit of electr 800 2.5 600 O 3 400 O 3.5 O Demand 200 (Private Value) 4 4.5 2 3 5 7 QUANTITY (Units of electric cars) 5 5.5 The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is units. To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a of $ per unit of electric cars.tax The market equilibrium quantity is * units of electric cars, but the socially optimal quantity of electric car production is subsidy o create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a of $ er unit of electric cars