3. The effect of negative externalities on the optimal quantityof consumption Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $350. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $350 per unit. 1000 900 O 800 700 0 El $11wa 600 (Private Cost) 500 O 400 300 O 200 O D 0 Demand 100 (Private Value) Social Cost PRICE (Dollars per unit of pharmaceuticals) O 1 2 3 4 5 6 7 QUANTITY (Units of pharmaceuticals) The market equilibrium quantity is V units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is V units. To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a V of l:] per unit of pharmaceuticals