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The table below shows the marginal private benefits and the marginal private costs of steel production. The marginal private benefits represent the market demand curve (D_Int), and the marginal private costs represent the market supply curve (S_Int).

Quantity of steel (in tons)	Marginal private benefits DInternal	Marginal private costs SInternal
1,000	$200	$50
2,000	$180	$60
3,000	$160	$70
4,000	$140	$80
5,000	$120	$90
6,000	$100	$100
7,000	$80	$110
8,000	$60	$210

Suppose that the production of steel leads to a negative externality, and the external cost is $20 per thousand tons. Compared to the socially optimal amount of steel, the amount of steel produced at the market equilibrium is     tons too

much

.

Answer 1

External cost = $20 per thousand tons.

Marginal social cost =Marginal private cost + External cost

Q	MSB	MPC	MSC
1000	200	50	70
2000	180	60	80
3000	160	70	90
4000	140	80	100
5000	120	90	110
6000	100	100	120
7000	80	110	130
8000	60	120	140

Market equilibrium occurs when marginal benefit equals marginal private cost , market equilibrium quantity = 6000 tons of steel. And the socially optimal output is when MSB = MSC , i.e socially optimal quantity is 5500 tons of steel. This implies that at market equilibrium there is too much of steel production than the socially optimal quantity.