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The price of steel is P1, at the intersection of the demand and supply curve in figure 18.1(b).

The MC curve in (a) gives a typical steel firm's marginal cost of production.

Figure 18.1(a) shows the production decision of a steel plant in a competitive market.

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We assume that because the firm has a fixed-proportions production function, it cannot alter its input combinations; waste and other effluent can be reduced only by lowering output.

We will analyze the nature of the externality under two circumstances: first when only one steel plant pollutes and second, when all steel plants pollute in teh same way.

Figure 18.1(a) shows the production decision of a steel plant in a competitive market.

Figure 18.1(b) shows the market demand and supply curves, assuming that all steel plants generate similar externalities.

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