5. The effect of external costs on the efficient level 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 $120 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 $120 per ton. 500 480 Social Cost 420 Supply (Private Cost PRICE (Dollars per ton of stool Demand 180 Private Value) 120 150 QUANTITY (Tons of steel) The market equilibrium quantity is tons of steel, but the socially optimal quantity of steel production is tons