Because of the externality, the cost to societyof producing aluminum is larger than the cost to the aluminum producers. For each unit of aluminum produced, the social costincludes the private costs of the aluminum producers plus the costs to those bystanders affected adversely by the pollution. Figure 2 shows the social cost of producing aluminum. The social-cost curve is above the supply curve because it takes into account the external costs imposed on society by aluminum production. The difference between these two curves reflects the cost of the pollu-tion emitted.What quantity of aluminum should be produced? To answer this question, we once again consider what a benevolent social planner would do. The plan-ner wants to maximize the total surplus derived from the market—the value to consumers of aluminum minus the cost of producing aluminum. The planner understands, however, that the cost of producing aluminum includes the external costs of the pollution.The planner would choose the level of aluminum production at which the demand curve crosses the social-cost curve. This intersection determines the opti-mal amount of aluminum from the standpoint of society as a whole. Below this level of production, the value of the aluminum to consumers (as measured by the height of the demand curve) exceeds the social cost of producing it (as measured by the height of the social-cost curve). The planner does not produce more than this level because the social cost of producing additional aluminum exceeds the value to consumers.
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