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3. The effect of negative externalities on the optimal quantity of consumption Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $600. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $600 per unit. PRICE (Dollars per unit of electric cars) 2000 1800 1600 1400 1200 1000 800 600 400 200 0 0 1 2 3 4 5 6 7 QUANTITY (Units of electric cars) Social Cost Supply (Private Cost) Demand (Private Value) The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is units. To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a of $ per unit of electric cars.

          3. The effect of negative externalities on the optimal quantity of consumption
Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of $600. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $600 per unit.
PRICE (Dollars per unit of electric cars)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
0 1 2 3 4 5 6 7
QUANTITY (Units of electric cars)
Social Cost
Supply (Private Cost)
Demand (Private Value)
The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is units.
To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a of $ per unit of electric cars.

3. The effect of negative externalities on the optimal quantity of consumption
Consider the market for electric cars. Suppose that a electric car manufacturing facility dumps sludge into a nearby river, creating a negative externality for those living downstream from the facility. Producing additional electric cars imposes a constant per-unit external cost of 600. The following graph shows the demand (private value) curve and the supply (private cost) curve for electric cars.
Use the purple points (diamond symbol) to plot the social cost curve when the external cost is600 per unit.
PRICE (Dollars per unit of electric cars)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
0 1 2 3 4 5 6 7
QUANTITY (Units of electric cars)
Social Cost
Supply (Private Cost)
Demand (Private Value)
The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is units.
To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a of per unit of electric cars.

Added by Nerea J.

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