For a typical negative externality market graph, with Demand curve (also labelled private value), and supply curve (private cost) and a social cost curve above the supply curve. What is the optimal quantity that maximizes total economic well being? Is it where the social cost curve and demand intersect or is it at zero?
The reason i am confused is because of the demand curve (private value), does this mean the society have no benefits from it at all, so the optimal quantity is at zero? What if the demand curve does not label as private value, the optimal will be where it intersects? So i treat that demand curve as the social demand curve?
optimal quantity is where the demand curve intersects the social cost curve. With this economic model, ALL social costs of the externality are reflected in the social cost curve. That is, the social cost curve represents the sum of the private cost of the supplier and the social cost of the externality. The demand curve represents the private value of various levels of consumption -- any additional "social" value to a person's private consumption would, if present, be reflected in the supply. curve adjustment. So, yes, you could think of the private demand curve as the social demand curve as well.
The optimal quantity that maximizes total economic well-being is indeed where the demand curve and the social cost curve intersect. This is because at this quantity, the marginal benefit to society from consuming one more unit of the good or service, as represented by the demand curve, is equal to the marginal social cost, which is the sum of the private cost of the supplier and the social cost of the externality.
The demand curve, also labeled as private value, represents the individual consumer's perceived value or willingness to pay for each unit of the good. This does not mean that society has no benefits from the good at all. It simply reflects the individual's personal preferences, which may or may not align with societal benefits. The optimal quantity takes into account both the private value to consumers and the social cost to society, balancing the interests of both.
If the demand curve is not labeled as private value, it could still be interpreted as representing the social demand curve. In this case, it would capture the aggregate demand or societal willingness to pay for the good. The important consideration is that the demand curve reflects the total value derived from consumption, whether it is labeled as private value or not.
To summarize, the optimal quantity that maximizes total economic well-being is where the demand curve intersects the social cost curve. The demand curve represents the private or social value of consumption, and it is important to consider the social cost of the externality when determining the optimal quantity.