3. The effect of negative externalities on the optimal quantity of consumption

Consider the market for paper. Imagine that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional tonne of paper imposes a constant external cost of $105 per tonne. The following graph shows the demand (private value) curve and the supply (private cost) curve for paper.

Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $105 per tonne.

Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $105 per tonne. 700 630 O Social Cost 560 490 Supply 420 (Private Cost) PRICE (Dollars per tonne of paper) 350 280 210 140 Demand (Private Value) 70 0 0 2 3 4 5 6 7 QUANTITY (Tonnes of paper) subsidy The market equilibrium quantity is tonnes of paper, but the socially optimal quantity of paper production is tax of $ per To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a tonne of paper