Electrical production generates substantial external costs in the form of pollutants. Suppose that the electricity market is otherwise competitive and that the private marginal costs and benefits of exchange can be described by the following equations, where the benefits and costs are in cents per kWh and the quantity is in thousands of kWh per month:

MPB = 250 0.75Qand MPC = 30 + 1.25Q

The marginal external cost of the pollution generated during production is 20 cents per kWh: MEC = 20

Write the equation of the marginal social cost function.

MSC = 30 + 1.25Q 20

MSC = 50 +1.25Q

Q1: Calculate the optimal (socially efficient) quantity of electricity that should be exchanged on the market. Assume the external cost from pollution generated during production is the only externality.