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3. The effect of negative externalities on the optimal quantityof consumption Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste
3. The effect of negative externalities on the optimal quantityof consumption Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $165 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for steel. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $165 per ton.1100 990 O Social Cost 880 770 O Supply 1.5 660 (Private Cost) 2 550 PRICE (Dollars per ton of steel) 2.5 440 330 3 220 3.5 O Demand 110 0 (Private Value) 0 4.5 2 3 5 6 QUANTITY (Tons of steel) 5 5.5 The market equilibrium quantity is tons of steel, but the socially optimal quantity of steel production is tons.subsidy The market equilibrium quantity is tons of steel, but the socially optimal quantity of steel production is tax To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose a of per tor of steel
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