Question

Homework (Ch 10) 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 $225 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $225 per ton. 47 1500 1350-

Answer 1

Quantity	Private value($)	Private cost ($)	Social cost ($) = Private cost + External cost
1	1350	150	375
2	1050	300	525
3	750	525	750
4	450	675	900
5	300	825	1050
6	225	975	1200

1500 1350 1200 1050 900 Price ($) 750 Private value Private cost 600 Social cost 450 300 150 0 o 1 2 3 5 4 7 Quantity (Tons of bolts)

Answer to blank 1: 3.5

Answer to blank 2: 3

Answer to blank 3: tax

Answer to blank 4: 225