3. The effect of negative externalities on the optimal quantity of consumptionConsider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negativeexternality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $600. Thefollowing graph shows the demand (private value) curve and the supply (private cost) curve for electric cars.Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $600 per unit.PRICE (Dollars per unit of electric cars)20001800160014001200100080060040020000+1O□☐O2345QUANTITY (Units of electric cars)The market equilibrium quantity is☐ Supply(Private Cost)6Demand(Private Value)7Social Cost(?)units of electric cars, but the socially optimal quantity of electric car production isTo create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose aper unit of electric cars.units.of $

Private cost is the cost that is privately incurred for the production of the output. Private cost…

The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is units. To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a per unit of electric cars. of $

The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is units. To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a per unit of electric cars. of $

ECON MICRO

5th Edition

ISBN:9781337000536

Author:William A. McEachern

Publisher:William A. McEachern

Chapter17: Externalities And The Environment

Section: Chapter Questions

Problem 2.3P: (Negative Externalities) Suppose you wish to reduce a negative externality by imposing a tax on the...

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Question

3. The effect of negative externalities on the optimal quantity of consumption
Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative
externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $600. The
following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $600 per unit.
PRICE (Dollars per unit of electric cars)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
0
+
1
O
□
☐
O
2
3
4
5
QUANTITY (Units of electric cars)
The market equilibrium quantity is
☐ Supply
(Private Cost)
6
Demand
(Private Value)
7
Social Cost
(?)
units of electric cars, but the socially optimal quantity of electric car production is
To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a
per unit of electric cars.
units.
of $

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