Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $300. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $300 per unit. PRICE (Dollars per unit of pharmaceuticals) 1000 T 900 800 700 600 500 400 300 200 100 0 0 O ☐ 1 ■ O The market equilibrium quantity is 2 3 5 QUANTITY (Units of pharmaceuticals) 0 4 6 Supply (Private Cost) Demand (Private Value) 7 Social Cost (?) units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units.
Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $300. The following graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $300 per unit. PRICE (Dollars per unit of pharmaceuticals) 1000 T 900 800 700 600 500 400 300 200 100 0 0 O ☐ 1 ■ O The market equilibrium quantity is 2 3 5 QUANTITY (Units of pharmaceuticals) 0 4 6 Supply (Private Cost) Demand (Private Value) 7 Social Cost (?) units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units.
Chapter17: Market Failure: Externalities, Public Goods, And Asymmetric Information
Section: Chapter Questions
Problem 10QP
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Transcribed Image Text:Consider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externality
for those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $300. The following
graph shows the demand (private value) curve and the supply (private cost) curve for pharmaceuticals.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $300 per unit.
PRICE (Dollars per unit of pharmaceuticals)
1000
900
800
700
600
500
400
300
200
100
0
0
1
O
O
O
The market equilibrium quantity is
2
3
5
QUANTITY (Units of pharmaceuticals)
0
4
6
Supply
(Private Cost)
Demand
(Private Value)
7
Social Cost
(?)
units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is
units.
Transcribed Image Text:To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose a
$
per unit of pharmaceuticals.
of
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