3. The effect of negative externalities on the optimal quantity of consumption C

Question

3. The effect of negative externalities on the optimal quantity of consumption Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of bolts imposes a constant external cost of $220 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts. al cost curve when the external cost is $220 per ton. 1100 T 990 880 t Social Cost ch the web and Windows

Explanation / Answer

Equilibrium quantity is 4.5

And socially efficient output=3.5 because social cost will be up compared to private cost by 220

Tax of 220 will produce te socially efficient output

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