Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality forthose living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $525 per ton. The following graphshows the demand (private value) curve and the supply (private cost) curve for steel.Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $525 per ton.15001350Social Cost12001050Supply(Private Cost)1.59007502.56004503003.5Demand150(Private Value)40.4.50.13.4QUANTITY (Tons of steel)5.5tons.The market equilibrium quantity is 3.5 tons of steel, but the socially optimal quantity of steel production istaxof$525 per tonTo create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose aof steel.2.3.5,PRICE (Dollars per ton of steel)

Social cost is the total cost to society. It includes private costs plus any external costs. Social…

v tons. The market equilibrium quantity is 3.5 v tons of steel, but the socially optimal quantity of steel production is tax of $525 per ton To create an Incentive for the firm to produce the socially optimal quantity of steel, the government could impose a

v tons. The market equilibrium quantity is 3.5 v tons of steel, but the socially optimal quantity of steel production is tax of $525 per ton To create an Incentive for the firm to produce the socially optimal quantity of steel, the government could impose a

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality for
those living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $525 per ton. The following graph
shows the demand (private value) curve and the supply (private cost) curve for steel.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $525 per ton.
1500
1350
Social Cost
1200
1050
Supply
(Private Cost)
1.5
900
750
2.5
600
450
300
3.5
Demand
150
(Private Value)
4
0.
4.5
0.
1
3.
4
QUANTITY (Tons of steel)
5.5
tons.
The market equilibrium quantity is 3.5 tons of steel, but the socially optimal quantity of steel production is
tax
of
$525 per ton
To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose a
of steel.
2.
3.
5,
PRICE (Dollars per ton of steel)

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