Question

park confer

Homework (Ch 10) 2. The effect of negative externalities on the optimal quantity of consumption Consider the market for paper. Suppose 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 ton of paper imposes a constant external cost of $140 per ton. 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 $140 per ton. Social Cost O F Supply (Private Cost) PRICE (Dollars per ton of paper) Demand (Private Value QO OT + QUANTI tons. The market equilibrium quantity is 5 tons of paper, but the socially optimal quantity of paper production is y of per ton To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a

Answer 1

To find the social cost, add $140 to private cost at each level of output. Social cost=private cost+ marginal negative externality

—630- 560- 490- -420- 350- 2801 210- 140- -70- 3 4 5 6| -70-

Market equilibrium quantity is 4 tons of paper but socially optimal quantity of paper is 3.5 tons of paper.

Reason- Market equilibrium is where Demand =supply

Social equilibrium is where Social cost= Demand

The government could impose a TAX of $140 per ton.

Reason- Tax will shift the supply curve upwards by $140 producing the same effect as social supply curve.

If it helps kindly upvote