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Homework answers / question archive / The supply and demand conditions facing a firm that makes widgets and generates a negative externality by dumping a highly toxic sludge in a nearby river is given in the table below
The supply and demand conditions facing a firm that makes widgets and generates a negative externality by dumping a highly toxic sludge in a nearby river is given in the table below.
a. What is the equilibrium price and quantity when only private costs are taken into account? Explain your reasoning.
b. What is the equilibrium price and quantity when social costs are taken into account? Explain your reasoning.
| Price | Quantity Demanded | Quantity Supplied without paying social costs | Quantity Supplied after paying social costs |
| 100 | 0 | 120 | 75 |
| 80 | 10 | 100 | 50 |
| 55 | 30 | 90 | 30 |
| 40 | 55 | 85 | 25 |
| 30 | 80 | 80 | 20 |
| 20 | 100 | 65 | 15 |
a. What is the equilibrium price and quantity when only private costs are taken into account? Explain your reasoning. The equilibrium price and quantity are $30 and 80 units, respectively. Equilbrium occurs at the point where supply and demand are equal. At this price, the number of units supplied is equal to the number of units demanded. As noted, externalities are not factored into the private decision, so only the costs without the externality are considered. At $30, the number of units demanded and number of units supplied without the external cost are both 80.
b. What is the equilibrium price and quantity when social costs are taken into account? Explain your reasoning. The equilibrium price and quantity are $55 and 30 units, respectively. When the social costs are factored into the decision, equilibrium is at the price where the quantity demanded and quantity supplied with social costs are equal. This occurs at a price of $55 and quantity of 30.
