Scenario 2A. There are three firms, A;B; and C that produce electricity. The first two firms have the same per-megawatt cost of production equal to $2, while firm C has a per-megawatt cost of $1. The firms differ, however, in their pollution. Firms A;B; and C produce respectively 1, 2, and 3 cubic feet of carbon monoxide per megawatt produced. A cubic foot of carbon monoxide pollutes the environment, and has a social cost of $2.5. The demand for electricity is represented by the inverse demand function P (Mw) =100 - Mw, where Mw represents the megawatts consumed by the public. Suppose firms are not held accountable for the pollution they produce. Scenario 2B. Suppose now that the government can measure the amount of pollution issued by each firm, and suppose that the government constrains each firm to emit no more than 9 cubic feet of carbon monoxide. Scenario 2C Suppose that government allows firms to trade their permits to emit carbon monoxide.
See below for three parts of Scenario 2
Scenario 2A. There are three firms, A;B; and C that produce electricity. The first two firms have the same per-megawatt cost of production equal to $2, while firm C has a per-megawatt cost of $1. The firms differ, however, in their pollution. Firms A;B; and C produce respectively 1, 2, and 3 cubic feet of carbon monoxide per megawatt produced. A cubic foot of carbon monoxide pollutes the environment, and has a social cost of $2.5. The demand for electricity is represented by the inverse demand function P (Mw) =100 - Mw, where Mw represents the megawatts consumed by the public. Suppose firms are not held accountable for the pollution they produce.
Scenario 2B. Suppose now that the government can measure the amount of pollution issued by each firm, and suppose that the government constrains each firm to emit no more than 9 cubic feet of carbon monoxide.
Scenario 2C Suppose that government allows firms to trade their permits to emit carbon monoxide.
-Use Scenario 2A. What is the competitive
-Use Scenario 2A. How much electricity is produced?
-Use Scenario 2A. How much pollution is there at the competitive equilibrium?
-Use Scenario 2A. What is the social cost at the pollution at the competitive equilibrium?
-Use Scenario 2A. What is the socially optimal quantity of pollution? (Hint: Your calculation should take into account the benefit of electricity and the social cost of pollution.)
-Use Scenario 2B to answer the following questions.
-Use Scenario 2B. What is the competitive equilibrium price of electricity (under this constraint)
-Use Scenario 2B. What is the competitive
-Use Scenario 2C to answer the following questions
-Use Scenario 2C. What is the competitive price of a permit to emit 1 cubic foot of carbon monoxide?
-Use Scenario 2C. How much electricity is produced after the permits are traded?
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