Consider a factory that produces solar panels in a country where the electricity grid is still primarily powered by coal. When a household buys solar panels, the nearby coal-fired power plant needs to produce less electricity, which reduces the level of air pollution in the surrounding area.

As you consider and discuss the following questions, think about the extent to which external effects might lead to differences between costs and/or benefits to the solar panel factory and to society at large. Be sure to state these assumptions and carry them through the assignment.

1. Without policy intervention, would you expect the marginal cost to the factory of producing an additional solar panel to be higher, lower, or the same as the marginal cost to society of the production of an additional solar panel?
2. Without policy intervention, would you expect the marginal benefit to the factory of producing an additional solar panel to be higher, lower, or the same as the marginal benefit to society of the production of an additional solar panel?