Power plants that rely on coal increase the amount of sulfur

Power plants that rely on coal increase the amount of sulfur dioxide that dissolves into the air eventually increasing the acidity of precipitation. The higher acidity of rain and snow can damage forests by making it more difficult for plants to absorb minerals from the soil. The equations below provide information about the market demand and supply of electricity. There is a constant marginal external cost of $25 per unit of electricity. Use this information to answer the following 4 questions D: Qd-200 - 2P S: Qs-P10 43. What type of externality is this problem addressing? Negative production externality b.Negative consumption externality c.Positive consumption externality d.Positive production externality 44. At the market equilibrium quantity, the marginal private cost of electricity isw hile the marginal social cost of electricity is $50; $75 $40; $90 $60; $10 $70; $95 45. What quantity of electricity satisfies allocative efficiency in this market? 60 70 50 43.3 d. 46. Which of the following potential solutions would move the market to allocative efficienc pose a tax of $25 per unit on the producers of electricity Offer a $25 per unit subsidy to consumers to compensate them for the cost of having fewer healthy trees c.Set the maximum legal quantity of sulfur dioxide that can be emitted to zero d.All of the above would result in allocative efficiency

Solution

43) Because there is an external cost imposed, it is a negative externality. Option A

44) Find market equilibrium

200 - 2P = P - 10

210 = 3P

P = 70

Hence private cost is 70 and social cost = private cost + external cost = 70 + 25 = 95. Option D

45) Allocative efficiency is determined by social equilibrium

200 - 2P = P - 25 - 10

235 = 3P

P = 78.33

Q = 200 - 2* 78.33 = 43.33

46) Option A. A tax equivalent to the external cost which is $25 per unit will eliminate externality,.