3. The effect of negative externalities on the optimal quantity of consumption 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 $40 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 $40 per ton. 200 130 Social Cost 160 1' a) g 140 '5 g 120 Supply g (Private Cast) a. 100 E E E n 80 I Demand 2 50 (Private Value) n: n. 40 20 D 1 Z 3 4 5 6 7 QUANTITY (Tons of steel) The market equilibrium quantity is v tons of steel, but the socially optimal quantity of steel production is v tons. To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose a v of- per ton of steel