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Hi, everyone.
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Today we will be solving problem two from chapter 10, which discusses what happens to what happens when the production of a good leads to a negative externality.
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And it asks us to consider two things.
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First, the social cost curve relative to the supply curve and second, the socially optimal quantity relative to the equilibrium quantity.
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And so to tackle the first part of this question, we need to define what the supply curve takes into account and what the social cost curve takes into account.
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The supply curve is just based off of the private cost of the good produced, whereas the social cost curve takes into account the private cost of producing the good, plus costs to bystanders that are affected by externalities of that good.
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So for this problem, let's use the example of producing aluminum.
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So when aluminum is produced, the factories emit pollution into the air, which is a negative externality of producing aluminum.
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So in this case, the supply curve would just take into account the private cost of producing aluminum, whereas the social cost curve would take into account the private cost of producing aluminum plus the effect on bystanders of breathing in all of that bad pollution.
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And so because the social cost curve takes into account both factors, it's going to be higher than the supply curve.
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So to illustrate this, we'll just draw our normal supply demand chart.
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And we've got the normal supply curve, call this s.
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And because the supply curve is just the private cost of aluminum production, but now the social cost curve takes into account that plus the costs to bystanders, the bad effect of breathing all that bad pollution in.
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Because of that, it'll raise the social cost curve.
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The social cost curve will end up above the supply curve because of the negative externality.
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Okay...