Answered: (ALL CREDIT GOES TO CENGAGE) Consider…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

(ALL CREDIT GOES TO CENGAGE)

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 $700. 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 $700 per unit.

(image is below)

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 _____ of _____ per unit of electricity.

PRICE (Dollars per unit of electricity)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
O
O
☐
1
O
2
3
O
U
4
5
QUANTITY (Units of electricity)
6
Supply
(Private Cost)
Demand
(Private Value)
7
Social Cost
?

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