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CHAPTER 10EXTERNALITIES209production, the value of the aluminum to consumers (as measured by the height ofthe demand curve) exceeds the social cost of producing it (as measured by the heightof the social-cost curve). The planner does not produce more than this level becausethe social cost of producing additional aluminum exceeds the value to consumers.Note that the equilibrium quantity of aluminum, QMARKET, is larger than thesocially optimal quantity, QOPTIMUM. The reason for this inefficiency is that the mar-ket equilibrium reflects only the private costs of production. In the market equilib-rium, the marginal consumer values aluminum at less than the social cost ofproducing it. That is, at QMARKETthe demand curve lies below the social-cost curve.Thus, reducing aluminum production and consumption below the market equi-librium level raises total economic well-being.How can the social planner achieve the optimal outcome? One way would beto tax aluminum producers for each ton of aluminum sold. The tax would shift thesupply curve for aluminum upward by the size of the tax. If the tax accurately re-flected the social cost of smoke released into the atmosphere, the new supply curvewould coincide with the social-cost curve. In the new market equilibrium, alu-minum producers would produce the socially optimal quantity of aluminum.The use of such a tax is called internalizing the externality because it givesbuyers and sellers in the market an incentive to take account of the external effectsof their actions. Aluminum producers would, in essence, take the costs of pollutioninto account when deciding how much aluminum to supply because the tax nowmakes them pay for these external costs. Later in this chapter we consider otherways in which policymakers can deal with externalities.POSITIVE EXTERNALITIES IN PRODUCTIONAlthough in some markets the social cost of production exceeds the private cost, inother markets the opposite is the case. In these markets, the externality benefitsbystanders, so the social cost of production is less than the private cost. One ex-ample is the market for industrial robots.“All I can say is that if being a leading manufacturer means being a leading polluter, so be it.”internalizing an externalityaltering incentives so that peopletake account of the external effects oftheir actions