3. The effect of negative externalities on the optimal quantityof consumptionConsider the market for pharmaceuticals. Suppose that a pharmaceutical factory dumps toxic waste into a nearby river, creating a negative externalityfor those living downstream from the factory. Producing additional pharmaceuticals imposes a constant per-unit external cost of $280. The followinggraph 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 $280 per unit.PRICE (Dollars per unit of pharmaceuticals)80072064056048040032024016080O123□ OOㅁ4Supply(Private Cost)Demand(Private Value)567QUANTITY (Units of pharmaceuticals)Social Cost?The market equilibrium quantity isunits of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production isunits.To create an incentive for the firm to produce the socially optimal quantity of pharmaceuticals, the government could impose aper unit of pharmaceuticals.$of

Externality is a term used in Economics for the problem when the actions or work of one person…

The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units. 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

The market equilibrium quantity is units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is units. 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

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

3. The effect of negative externalities on the optimal quantityof consumption
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 $280. 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 $280 per unit.
PRICE (Dollars per unit of pharmaceuticals)
800
720
640
560
480
400
320
240
160
80
O
1
2
3
□ O
O
ㅁ
4
Supply
(Private Cost)
Demand
(Private Value)
5
6
7
QUANTITY (Units of pharmaceuticals)
Social Cost
?
The market equilibrium quantity is
units of pharmaceuticals, but the socially optimal quantity of pharmaceuticals production is
units.
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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