Answer Happy

3. 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 marginal external cost (MEC) of $300 per ton. The following graph shows the demand (marginal private benefits, or MPB) curve and the supply (marginal private costs, or MPC) curve for paper. Use the purple points (diamond symbol) to plot the marginal social costs (MSC) curve when the marginal external cost is $300 per ton. 1500 1350 MSC 1200 1050 900 750 600 450 300 150 0 PRICE (Dollars per ton of paper) 0 ■ 1 0 2 ☐ 3 O 4 ☐ 5 Supply (MPC) O Demand (MPB) 6 7
0 1 6 7 The market equilibrium quantity is tons of paper, but the socially optimal quantity of paper production is To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a of paper. 2 3 4 5 QUANTITY (Tons of paper) tons. per ton