The marginal social cost (MSC) of an electricity generating plant that uses coal is estimated by a consulting firm to be MSC=3Q, where Q is the output. The consulting firm also provides an estimate of the supply schedule. The marginal private cost (MPC) is estimated to be MPC=Q. The demand is estimated to be P=60-2Q.

a) Given these estimates, what is the impact of the externality? How large is the over- or underproduction? What is the socially optimal price? Is there over- or under-pricing? (4)

b) Discuss different methods to correct the externality and the advantages and disadvantages of these methods. Explain. (3)

c) In which sense is the Coase Theorem useful in helping to deal with negative externalities? State and explain the Coase Theorem. (3)