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4. The effect of negative externalities on the optimal quantity of consumption Consider the market for bolts. Suppose that a hardware factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of bolts imposes a constant marginal external cost of $220 per ton. The following graph shows the demand curve and the private marginal cost (MC) curve for bolts. (Note: The demand for the plant's bolt is the same as the social marginal benefit (MBS) curve.) Use the purple points (diamond symbol) to plot the social marginal cost curve when the marginal external cost is $220 per ton. Note: 1100 Social Marginal Cost O Supply (MC 580 PRICE (Dollars per ton of bolts) 440 Demand 230 (MB=MBS) 20 1 10 QUANTITY (Tons of bolts) The competitive market quantity is tons of bolts, but the allocationly efficient quantity of bolt production is * tons. To create an incentive for the firm to produce the allocationly efficient quantity of bolts, the government could impose a of $ per ton of bolts.990 Social Margi FFO 1.5 Supply (MC) 2 PRICE (Dollars perton of bolts) 2.5 O Demand 340 (MB=MBS) 3.5 4.5 13 T QUANTITY bolts ) 5 5.5 The competitive market quantity is tons of bolts, but the allocationly effic To create an incentive for the firm to produce the allocationly efficient quantity of bo1.5 2 2.5 3 3.5 4.5 5 5.5 t production is tons. could impose a of berIt production is subsidy t could impose a per