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Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from
Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $420. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $420 per unit. PRICE (Dollars per unit of electricity) 1200 1080 960 840 720 600 480 360 240 120 0 1 2 5 6 QUANTITY (Units of electricity) Supply (Private Cost) Demand (Private Value) Social Cost The market equilibrium quantity is, units of electricity, but the socially optimal quantity of electricity production is units. To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a unit of electricity. per
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