Consider the following diagram showing monthly market demand for electricity, where t electricity is generated by burning coal. The mining, processing, and burning of coal have consider able environmental and health costs associated there not reflected in the market price for the fin-product€”electricity. The diagram below shows the market demand for electricity and private margin costs of production.

a. Current estimates for the full social cost of electricity generated by burning coal vary greatly but suggest that it could be many times higher than current market prices in Canada and the United States. Supposing the external cost associated with producing one kilowatt hour (kwh) of electricity is $0.25, draw the marginal social cost curve for this market.
b. What quantity of electricity will be produced and consumed in the absence of government intervention in this market? What will be the price?
c. What is the socially optimal price per kwh and quantity consumed of electricity? Explain.
d. Explain how a special tax might be used to get electricity-producing firms to produce the allocatively efficient level of output.

Transcribed Image Text:

50Г 45 40 35 30 15 10 24 68101214 16 18 2 Milions of kwh of Electricity