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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 $120. 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 $120 per unit. PRICE (Dollars per unit of electricity) 600 540 480 420 360 300 240 180 120 60 O 0 0 1 2 3 4 பI Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Units of electricity) 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 $120. 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 $120 per unit. PRICE (Dollars per unit of electricity) 600 540 480 420 360 300 240 180 120 60 O 0 0 1 2 3 4 பI Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Units of electricity) 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

Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter10: Externalities
Section: Chapter Questions
Problem 2PA
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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 $120. 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 $120 per unit. PRICE (Dollars per unit of electricity) 600 540 480 420 360 300 240 180 120 60 O 0 0 1 2 3 4 பI Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Units of electricity) 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
Transcribed Image Text: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 $120. 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 $120 per unit. PRICE (Dollars per unit of electricity) 600 540 480 420 360 300 240 180 120 60 O 0 0 1 2 3 4 பI Supply (Private Cost) Demand (Private Value) 5 6 7 QUANTITY (Units of electricity) 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
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