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.