area where the firm is playing.

Step 2. Identify the initial equilibrium price and quantity only taking private costs into account. Next, identify the

new equilibrium taking into account social costs as well as private costs. Remember that equilibrium is where the

quantity demanded is equal to the quantity supplied.

Step 3. Look down the columns to where the quantity demanded (the second column) is equal to the “quantity

supplied without paying the costs of the externality” (the third column). Then refer to the first column of that row

to determine the equilibrium price. In this case, the equilibrium price and quantity would be at a price of $10 and
a quantity of five when we only take into account private costs.

Step 4. Identify the equilibrium price and quantity when we take into account the additional external costs. Look

down the columns of quantity demanded (the second column) and the “quantity supplied after paying the costs
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