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1. Consider the market for electricity generated by coal. Suppose demand (in megawatt hours} is given by Q = 50 P where P is the
1. Consider the market for electricity generated by coal. Suppose demand (in megawatt hours} is given by Q = 50 P where P is the price per megawatt hour and Q is the quantity demanded The marginal private cost of generating electricity from coal is $10 per megawatt hour. Suppose further that smoke is generated in the production of electricity in direct proportion to the amount of electricity generated. The health damage from the smoke is $15 per megawatt hour generated. (a) [17 points) Suppose the coal-red electricity is produced by competitive producers. (Hint: in a competitive market, the price equals marginal private cost). What price will be charged and how much electricity will be produced? (b) (6 points) Draw a diagram showing the demand curve, the marginal private cost curve, the marginal damage. and the price and quantity in a competitive market. {c} (5 points) What is the consumer surplus from the electricity generation? What is the net surplus, taking into account the pollution damage? (d) (T points} What quantity of coalfired electricity generation would maximize net consumer surplus (that is net of pollution damage)? {e} (5 points} Draw a diagram showing the demand curve, the marginal private cost curve. the marginal damage, and the price and quantity when net consumer surplus {net of pollution damage] is maximized
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