3. The effect of negative externalities on the optimal quantityof consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $90. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $90 per unit (?) 800 540 Social Cost 420 Supply 360 (Private Cost) PRICE (Dollars per unit of electric cars) 300 240 180 120 O Demand (Private Value) 2 QUANTITY (Units of electric cars) The market equilibrium quantity is > units of electric cars, but the socially optimal quantity of electric car production is * units. of $ To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a per unit of electric cars. Grade It Now Save & Continue