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 $240. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Social Cost 640 O 560 480 O 1.5 400 2 PRICE (Dollars per unit of pharmaceuticals) Supply (Private Cost) 320 2.5 O Demand 240 3 (Private Value) 160 3.5 80 4 1 2 3 4.5 5 6 7 QUANTITY (Units naceuticals) 5 5.5 The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units.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 per unit of pharmaceuticals. Social Cost 640 O 56 O 48 O 1.5 400 O PRICE (Dollars per unit of pharmaceuticals) Supply 2 (Private Cost) 320 2.5 O Demand 240 (Private Value) 3 160 0 3.5 80 4 0 0 1 2 3 5 6 7 4.5 QUANTITY (Units of pharmaceuticals) 5 5.5 The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units.The market equilibrium quantity is Y units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals producti units. tax To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a V of per unit of pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost ls $240 per unit. 800 + 720 E40 SOCIaI Cost 560 480 400 Supply (Private Cost) 320 Demand 240 (Private Value) 160 PRICE (Dollars per unit of pharmaceuticals) 0 1 2 3 4 5 6 7 QUANTITY (Units of pharmaceuticals)