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 $200. 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 $200 per unit. 1000 Social Cost 80 O 700 O 800 Supply (Private Cost) 500 PRICE (Dollars per unit of electricity) 400 O Demand 300 (Private Value) 200 100 2 3 5 6 QUANTITY (Units of electricity) 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 of $ per unit of electricity
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