2. The effect of negative externalities on the efficient quantity of consumption Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of paper imposes a constant external cost of $385 per ton. The following graph shows the demand (marginal private benefit) curve and the supply (marginal private cost) curve for paper. Use the purple points (diamond symbol) to plot the marginal social cost curve when the external cost is $385 per ton. PRICE (Dollars per ton of paper) 1100 990 880 770 660 550 Supply (MPC) 440 330 220 110 0 0 1 2 3 4 Demand (MPB) 5 8 7 QUANTITY (Tons of paper) Marginal Social Cost tax The market equilibrium quantity is tons of paper, but the socially efficient quantity of paper production is subsidy To create an incentive for the firm to produce the socially efficient quantity of paper, the government could impose a of paper. of $ per ton 2. The effect of negative externalities on the efficient quantity of consumption Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of paper imposes a constant external cost of $385 per ton. The following graph shows the demand (marginal private benefit) curve and the supply (marginal private cost) curve for paper. Use the purple points (diamond symbol) to plot the marginal social cost curve when the external cost is $385 per ton. PRICE (Dollars per ton of paper) 1100 990 880 770 660 Supply (MPC) 550 440 330 220 110 0 + 0 1 2 3 4 Demand (MPB) 5 8 7 QUANTITY (Tons of paper) Marginal Social Cost The market equilibrium quantity is tons of paper, but the socially efficient quantity of paper production is tons. To create an incentive for the firm to produce the socially efficient quantity of paper, the government could impose a of paper. of $ per ton