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 $240. 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 $240 per unit. PRICE (Dollars per unit of electricity) 800 720 640 560 480 400+ 320 240 Supply (Private Cost) Demand (Private Value) 160 [- 80 0 0 1 2 3 4 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
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 $240. 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 $240 per unit. PRICE (Dollars per unit of electricity) 800 720 640 560 480 400+ 320 240 Supply (Private Cost) Demand (Private Value) 160 [- 80 0 0 1 2 3 4 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
Chapter8: Market Failure
Section: Chapter Questions
Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...
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Transcribed Image Text: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 $240. 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 $240 per unit.
PRICE (Dollars per unit of electricity)
800
720
640
560
480
400+
320
240
Supply
(Private Cost)
Demand
(Private Value)
160
[-
80
0
0
1
2
3
4
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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