Question 1 A power plant produces electricity for 100,000 customers. The power p
ID: 1117266 • Letter: Q
Question
Question 1
A power plant produces electricity for 100,000 customers. The power plant burns coal. Burning coal releases sulfur dioxide and other pollutants into the atmosphere.
Long-term studies in the area reveal that the power plant causes 20 cases of asthma and 5 premature deaths per year due to pollution.
A. Calculate the negative externality cost of the power plant per year if we assume health care for each case of asthma is $5,000 and the value of a statistical life (VSL) is $1,000,000.
B. If a Pigouvian tax on the customer was put in place to fully account for the externality, how much more would each customer pay for his or her electricity each year.
C. What would happen to the quantity of electricity consumed? Explain your answer in brief.
Question 2 (use attached graph or your own)
A suburban area has a high incidence of tick-borne diseases. As a result some people pay to have their property sprayed to reduce their own risk. When this happens it creates a “community benefit” because the pool of infectious ticks in the community is reduced, slowing the spread of tick-borne disease on neighboring properties.
The demand schedules during the season for spraying a standard size property is as follows:
Price per Spraying Demand (number of sprayings) Supply (number of sprayings)
300 750 950
275 800 900
250 850 850
225 900 800
200 950 750
175 1000 700
A. Graph the private supply and demand curves. What is the private market equilibrium price and quantity?
B. Assume that every time a home owner has his or her property sprayed it provides a community benefit worth $75. Show how this is presented on the graph.
C. From a social welfare point of view are home owners in this example now under-consuming or over-consuming the pesticide treatment? Explain your answer in brief.
D. If there were a Pigouvian tax or subsidy what would be the new equilibrium price and quantity?
PRICE
150 200 250 300
Quantity
800
850
900
950
Quantity
800
850
900
950
Explanation / Answer
Question 1
A) Negative Externality will equal to the monetary value of loss due to pollution
= health care bill +total value of a statistical life.
= 20*5000+ 5*100000 = $600000
B) Total Pigouvian tax will be equal to the total externality cost.
Each customer share of the tax = 600000/100000 = $6
Each customer will pay $6 more.
C) The quantity consumed wil decrease as the tax will decrease the demand for electricity.
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