3. The effect of negative externalities on the optimal quantity of consumption Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $210. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $210 per unit. PRICE (Dollars per unit of electricity) 600 540 480 420 360 300 240 180 120 60 0 0 O 0 1 O 0 ☐ O 2 5 QUANTITY (Units of electricity) 8 Supply (Private Cost) Demand (Private Value) 7 Social Cost (?) The market equilibrium quantity is units of electricity, but the socially optimal quantity of electricity production is ▼ units. To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a unit of electricity. of $ per

3. The effect of negative externalities on the optimal quantity of consumption Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $210. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $210 per unit. PRICE (Dollars per unit of electricity) 600 540 480 420 360 300 240 180 120 60 0 0 O 0 1 O 0 ☐ O 2 5 QUANTITY (Units of electricity) 8 Supply (Private Cost) Demand (Private Value) 7 Social Cost (?) The market equilibrium quantity is units of electricity, but the socially optimal quantity of electricity production is ▼ units. To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a unit of electricity. of $ per

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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