After you have studied Economics in the News on pp. 452–453, answer the following questions.

a. What are the marginal private benefits and marginal private costs of using carbon-free resources to generate electricity?

b. What are the marginal social benefits and marginal social costs of using carbon-free resources to generate electricity?

c. How will a carbon tax or pricing scheme change the price that households pay for electricity?

d. How will a carbon tax or pricing scheme change the efficiency of electricity production?

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When 1 ton of coal is used to generate electricity, it emits 3.67 tons of CO. The amount of carbon emitted from using coal and other fossil fuels has increased the atmo- spheric concentration of CO by 50 percent since 1800. Carbon emissions are a negative externality that make the marginal social cost of electricity exceed its marginal private cost. Left to unregulated market forces, there is an inefficient overproduction of electricity generated using coal and a deadweight loss. This problem is what the banks and finance organizations described in the news article seek to address. Figure 1 illustrates the problem. The demand for and mar- ginal social benefit of electricity is D = MSB. The supply of electricity and the marginal private cost curve is S = MC and the marginal social cost curve is MSC. Price (dollars per megawatt-hour) 300 250 200 150 100 50 O I 1 Deadweight loss from carbon emissions Efficient quantity 2 MSC 4 S = MC D = MSB 1 3 5 Quantity (terawatt-hours per year)