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 $140 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 $140 per ton. Social Cost Supply (Private Cost) PRICE (Dollars per ton of bolts) Demand (Private Value) QUANTITY (Tons of bolts) The market equilibrium quantity is tons of bolts, but the socially optimal quantity of bolt production is tons p erton To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a of bolts.

Answer 1

External cost = $140 per ton

Social cost = Private cost + External cost

From the given graph we get the table as shown below:

Q	Demand (Private value)	Supply (private cost)	Social cost
1	560	35	175
2	490	105	245
3	420	210	350
4	350	280	420
5	280	350	490
6	245	420	560

By plotting this we get the social cost curve as shown below:

PRICE (Qollars per ton of Belts 700 a A Soual Cost sto 490 420 primate tost mrsupply) - Demand (Binate values 210 14 0 1 2 3 4 5 6 7 tons of balte)

The market equilibrium quantity is 4.5 tons of bolts where demand equals supply , but the socially optimal quantity of bolt production is 3.5 tons where demand equals social cost.

To create an incentive to produce the socially optimal quantity of bolts,the government could impose a tax of $140 per ton i.e external cost.