1. 3. The effect of negative externalities on the optimal quantityof consumption Consider the
market for pharmactuticald. Suppose that a pharmacoutical factory durnps toule waste into a
nearby river, creating a negative emetemalify for those llving downstreern from the Adctory.
Producing addabnal pharmacruticals imposes a constant per-uhit extermal cost of 5665 . The
follening graph thows the demand (private value) curve and the supply (private cost) curve for
phammacesticals. Uhe the purpie points (diamond symbov) to plot the sociaf cost curve when the
eiternal cost is s6b5 per unt.
The market equitibrium quantity is units of pharmaceuticale, but the socially ootimal quantity of
pharmaceuticais production is units. To create an incentive for the firm to produce the socislly
optimal quantify of pharmaceuticals, the gevermment could impoie o per unit of
pharmaceuticals.