Electricity generation with coal fired plants emits sulphur dioxide, the main ca

Question

Electricity generation with coal fired plants emits sulphur dioxide, the main cause of acid rain. Acid rain damages the historic monuments in the city centre, thus making the city less attractive for tourists. Demand for electricity is equal to QD = 360 - 12P. The supply curve of electricity is given by Qs-200+4P. The marginal cost of monument degradation from acid rain to the tourist industry is 50$ per unit of electricity output. (a) Producing electricity with coal fired plants produces a externality (b) The Marginal Cost equation is MC The Social Marginal Cost equation is SMC = The Social Marginal Benefit equationis M (e) in a competitive market the comeiiveeuumqntity of electicity ia a price of $ At the quantity found in part (c), the social marginal cost is $ The social marginal benefit is $ The social marginal surplus is $ (d)

Explanation / Answer

(a) Producing electricity with coal fired plants produces a negative externality. Because producing electricity with coal fired plants emits sulphur dioxide , main cause of acid rain and it imposes a negative impact on the society. And this increase the social cost.

(b) Social marginal Cost (SMC) = Private marginal cost + marginal external cost ( and here Marginal external cost is $50 per unit).

Social marginal benefit (SMB) = private marginal benefit + marginal external benefit (and here marginal external benefit = zero, beacuse this is the negative externality case.)

  

(c) In a competitive market , the competitive equilibrium quantity of electricity is 240 units , at a price of $10 per unit.

In a competitve market Qd = Qs

360-12P = 200 +4P

360-200 = 4P + 12P

P= 160/16 = $10

So the equilibrium price is $10 per unit.

Put P=$10 in Qd equation we get,

Qd=360-12(10)

=360-120 = 240

So the equilibrium quantity is 240 units.

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