Question

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 $315 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 $315 per ton. ? 900 810 Social Cost 720 630 540 PRICE (Dollars per ton of bolts) 450 Supply (Private Cost) 360 O 270 O Demand (Private Value) 180 O 90 D 0 0 1 3 4 5 6 7 2 QUANTITY (Tons of bolts) The market equilibrium quantity is tons of bolts, but the socially optimal quantity of bolt production is tons of $ per ton To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a of bolts.

Answer 1

equilibrium is achieved at the output levet where Qs:& equilibrium quantity, or = 4.5 tons bolts 5 Msc. MPC & MEC 315 + 315 $630 will shift to this, MPC curve include leftward 10 is 3 tons thus negative externality the social optimal quantity the govt. impose a tax of (495- 180) $315 per +5+ don l.e., of butts : Msc 9 PC + tax 20 where tax e & 315 por ton.