Table I shows the demand schedule for electricity from a coal burning utility. T
ID: 1215663 • Letter: T
Question
Table I shows the demand schedule for electricity from a coal burning utility. Table 2 shows the utility's cost of producing electricity and the external cost of the pollution created. Suppose the government levies a pollution tax such that the utility generates the efficient quantity of electricity. What are the quantity of electricity generated, the price of electricity, the size of the pollution tax, and the tax revenue? The quantity of electricity generated is kilowatts a day and the price of electricity is cents a kilowatt. The pollution tax is cents a kilowatt hour. The tax revenue is $ a day. Remember that the price given on the y=axis is n cents but you must answer in dollars. Price (cents per kilowatt) Quantity demanded (kilowatts per day) 4 500 8 400 12 300 16 200 20 100 24 0 Quantity (kilowatts per day) Marginal cost marginal external cost (cents for kilowatts) 0 0 0 100 2 2 200 4 4 300 6 6 400 8 8 500 10 10Explanation / Answer
According to the table 2 data, utility cost and external cost combine together to become the price charged by the supplier. Here, external cost is added as tax as a part of the price.
For 300 kilowatt production, price = utility cost + external cost = 6+6 = 12 cents
It is the supply of electricity that is compared with demand schedule of table 1.
At 12 cents per kilowatt price, demand and supply matches and equilibrium is established.
Thus,
Quantity of electricity generates is 300 Kilowatts a day and price of electricity is 12 cents a kilowatt.
The pollution tax is 6 cents per kilowatt
Tax revenue = 6*300 = 1800 cents or $18 per day.
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