First Blue Line options are --- 1.5, 2.0, 2.5, 3.0, 3.5, 4.0, 4.5, 5.0, 5.5 Seco

Question

First Blue Line options are --- 1.5, 2.0, 2.5, 3.0, 3.5, 4.0, 4.5, 5.0, 5.5

Second Blue Line are same options as above

Third blue line options are ----- tax, subsidy

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 $165 per ton. 1100 990 Social Cost 880 770 Supply (Private Cost) 660 &550 440 330 Demand 110 (Private Value) 4 QUANTITY (Tons of steel) The market equilibrium quantity is tons of steel, but the socially optimal quantity of steel production is tons To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose a of$ per ton

Explanation / Answer

Answer- The supply curve would shift rightwards with new equilibrium price 220(optimal quantity)=5 tons

But demand curve will shift leftwards to include excess cost . Hence equilibrium will be 2 tons at 330 price by

Nishant Bhatt

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