Problem Set 8 1. Dirty Laundry Polly owns an electric power plant in the city of Newtown. The market price of electricity in Newtown is $1.00 per kilowatt hour (kwh). Polly's marginal costs of electricity production are MC=.5+0.025Q, where Q is the number of kwh generated. Skye owns a laundry service that operates next door to Polly's power plant. Skye's specialty in town is the "spring fresh" scent they achieve by air-drying laundry outside. In producing electricity, Polly also produces smoke. Unfortunately, Polly's smoke dirties Skye's laundry, creating costs for Skye of $0.25 for each kwh Polly produces. a. How much electricity will Polly produce in a free market? b. What is the efficient quantity of electricity that Polly should produce, taking the effects on Skye's business into account? c. If your answers to (a) and (b) differ, describe the phenomenon that is behind this difference. d. Suggest some possible solutions to the market failure in this situation