3. The effect of negative externalities on the optimal quantity of consumption Consider the market for…
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Question “3. The effect of negative externalities on the optimal quantity of consumption Consider the market for…”
Answer
It is stipulated that each additional ton in steel production will result in an external constant cost of $385 per ton.
So,
This will increase the private cost curve by $385 for each ton of steel that is produced.
The required figure is as follows:
The output of 4.5 tonnes of steel is due to the intersection of supply and demand (private cost/private value).
The demand curve (private value) and the social cost curve (social cost) intersect each other, resulting in 3 tons of steel being produced.
So,
The socially optimal amount of steel production is 3.0 tons.
The government could impose a tax on steel weighing 385 lbs to encourage the company to produce the most socially-beneficial amount of steel.
Conclusion
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