The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose per uns of electric cars units.

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Chapter8: Market Failure
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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 $420. 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 $420 per unit.
?
PRICE (Dallars per unt of eledric cars)
1200
1000
900
140
720
800
480
300
240
B
QUANTITY (Units of electric cars)
Supply
(Private Cost)
Demand
(Private Value)
Social Cost
The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is
To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a
per uns of electric cars
27
units.
Transcribed Image Text: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 $420. 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 $420 per unit. ? PRICE (Dallars per unt of eledric cars) 1200 1000 900 140 720 800 480 300 240 B QUANTITY (Units of electric cars) Supply (Private Cost) Demand (Private Value) Social Cost The market equilibrium quantity is units of electric cars, but the socially optimal quantity of electric car production is To create an incentive for the firm to produce the socially optimal quantity of electric cars, the government could impose a per uns of electric cars 27 units.
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