Externalities and Public Goods *GRADED* 3 . The effect of negative externalities on the optimal quantity of consumption Consider the market for paper. Imagine that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional tonne of paper imposes a constant external cost of $220 per tonne. The following graph shows the demand (private value) curve and the supply (private cost) curve for paper. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $220 per tonne. 1100 990 Social Cost 880 O 770 O 660 O Supply (Private Cost) 550 PRICE (Dollars per tonne of paper) 440 O Demand 330 (Private Value) 220 110 2 3 5 6 QUANTITY (Tonnes of paper)The market equilibrium quantity is V tonnes of paper, but the socially optimal quantity of paper production is v tonnes. To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a V of $ per Continue wilhoui saving tonne of paper