Question

1. 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 $105 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 $105 per ton. ? 700 630 O Social Cost 560 490 O Supply (Private Cost) 420 PRICE (Dollars per ton of bolts) 350 D 280 210 O 140 0 Demand (Private Value) 70 0 0 1 5 6 7 2 QUANTITY (Tons of bolts) The market equilibrium quantity is 4.5 tons of bolts, but the socially optimal quantity of bolt production is 3.5 tons. tax of $220 per ton To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a of bolts.

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Answer 1

to equilibrium is achieved at the output land where bolts i equilibrium quantity, Q = 3.5 ton of MSC : MPC +MEC 280 +105 this 101 MPC curve to include will shift left ward negative externality the social optimal quantity ichs at 1885 is 300 tona 3 tons 15 3so-245 should impose a ta a tar of the Biosperton & bolts pe) 20 ; MSC - MPC & tax edat, where fax = $105 porton 25