Micro theory

1. (40 points) Externalities Consider the electric company of a city. The company uses coal fuel to produce electricity. In the process of producing electricity the rm emits greenhouse gasses and that contributes to the numerous problems that arise from global warming. The inverse demand and inverse supply for electricity are given by the following expressions: pd = 100%; The marginal external cost of burning coal is given by M EC : 2g. (a) (5 points) Classify the externality by type: positive or negative. And, by origin: consumption or production. (Explain) (b) (10 points) Represent graphicale the Marginal Private Benet, Marginal Private Cost, Marginal Social Benet and/ or Marginal Social Cost. (c) (5 points) Find the perfectly competitive market equilibrium quantity of electricity. ((1) (10 points) Find socially efficient production level. (e) (10 points) How can the government correct the market failure caused by the externality using taxes or subsidies? (Explain)