Question 2. [9 marks] Consider the following diagram showing the monthly market demand for electricity, where the
Question:
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Question 2.
[9 marks]
Consider the following diagram showing the monthly market demand for
electricity, where the electricity is generated by burning coal. The mining, processing, and burning of
coal have considerable environmental and health costs associated that are nor reflected in the marker
price for the final product
-
electricity. The diagram below shows the market demand for electricity
and private marginal costs of production.
a.
[3 marks]
Current estimates for the full social cost of electricity generated by burning coal
vary
great
ly but suggest that it could be many times higher than current market prices in Canada and
the United States. Supposing the external cost associated with producin
g one kilowatt hour (kwh)
of electricity is $0.25, draw the marginal social cost curve for this market.
b.
[2 marks]
What quantity of electricity will be produced and consumed in the absence of
government intervention in this marker? What will be the price?
c.
[
2 marks]
What is the socially optimal price per kwh and quantity consumed of electricity? Explain.
d.
[2 marks]
Explain how a special tax might be used to get electricity
-
producing firms to produce the
allocatively efficient level of output.
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