Question
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 $220 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for bolts. al cost curve when the external cost is $220 per ton. 1100 T 990 880 t Social Cost ch the web and Windows
Explanation / Answer
Equilibrium quantity is 4.5
And socially efficient output=3.5 because social cost will be up compared to private cost by 220
Tax of 220 will produce te socially efficient output