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 $90 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 $90 per ton. PRICE (Dollars per ton of bolts 600 540 480 420 360 300 240 180 120 60 0 0 C ☐ 1 O ☐ 2 O 0 3 4 QUANTITY (Tons of bolts) 0 The market equilibrium quantity is O ☐ 5 Supply (Private Cost) Demand (Private Value) 6 7 Social Cost (?) ▼ tons of bolts, but the socially optimal quantity of bolt production is To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a $ per ton of bolts. tons. of
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 $90 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 $90 per ton. PRICE (Dollars per ton of bolts 600 540 480 420 360 300 240 180 120 60 0 0 C ☐ 1 O ☐ 2 O 0 3 4 QUANTITY (Tons of bolts) 0 The market equilibrium quantity is O ☐ 5 Supply (Private Cost) Demand (Private Value) 6 7 Social Cost (?) ▼ tons of bolts, but the socially optimal quantity of bolt production is To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a $ per ton of bolts. tons. of
Chapter8: Market Failure
Section: Chapter Questions
Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...
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Transcribed Image Text: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 $90 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 $90 per ton.
PRICE (Dollars per ton of bolts
600
540
480
420
360
300
240
180
120
60
0
0
C
☐
1
O
☐
2
O
0
3
4
QUANTITY (Tons of bolts)
0
The market equilibrium quantity is
O
☐
5
Supply
(Private Cost)
Demand
(Private Value)
6
7
Social Cost
(?)
▼ tons of bolts, but the socially optimal quantity of bolt production is
To create an incentive for the firm to produce the socially optimal quantity of bolts, the government could impose a
$ per ton of bolts.
tons.
of
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