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Ans) Negative externality is when the bystander bears the cost of any activity. Here social cost is more than private cost. The difference between social cost and private cost is known as external cost. When this external cost is ignored, goods are overproduced by the market.
To internalise this externality, government imposes tax equal to external cost.
3. The effect of negative externalities on the optimal quantity of consumption Consider the market for steel. Suppose that a steel manufacturing plant dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the plant. Producing an additional ton of steel imposes a constant external cost of $150 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for steel.
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Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $150 per ton. Social Cost PRICE (Dollars per ton of steel) Supply (Private Cost) Demand (Private Value) 1 2 3 4 5 6 7 QUANTITY (Tons of steel, Qefficient amarket 3; Sony The market equilibrium quantity is tons of steel, but the socially optimal quantity of steel production is tons. o f $ per ton To create an incentive for the firm to produce the socially optimal quantity of steel, the government could impose a U of steel.
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