3. The effect of negative externalities on the optimal quantityof consumption Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river. creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant perunit external cost of $120. The following graph shows the demand {private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the soci'a.I cost curve when the external cost is $120 per unit. sou 54o * 430 ' awaiting 3' E E 420 + (U a \"e 360 - SUDDW . g (Private Cost) 3 300 * D. E 240 * 8 Demand Lu 18:: - (Privaieyaiue) 2 o: o. 120 * so * o 4 l l I l l l l u 1 2 3 4 5 a 7 QUANTITY (u nits of electricity) The market equilibrium quantity is V units of electricity, but the socially optimal quantity of electricity production is V units. To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a V of- per unit of electricity. 480 420 O 1.5 360 O 0 Supply (Private Cost) 2 300 PRICE (Dollars per unit of electrity) 240 2.5 O Demand 180 0 (Private Value) 3 120 3.5 60 4 0 4.5 1 2 3 4 5 6 7 QUANTITY (Units of electricity) 5 5.5 The market equilibrium quantity is units of electricity, but the socially optimal quantity of electricity production is units.subsidy The market equilibrium quantity is V units of electricity, but the socially optimal quantity of electricity production is tax To create an incentive for the rm to produce the socially optimal quantity of electricity, the government could impose a V of- per unit of electricity