The production of electricity creates a lot of pollution. Whether coal or natural gas is being

burned to create electric power, there are severe negative externalities from the production

and consumption of energy.

1. Will the price of electricity be higher or lower if it is produced by a single monopolist

rather than in a perfectly competitive industry? Why?

2. Will the quantity of electricity consumed be higher or lower if it is produced by a single

monopolist rather than in a perfectly competitive industry? Why?

3. Will the total negative externality caused by pollution created in the production and

provision of electricity be higher or lower if electricity is produced by a single monopolist

rather than in a perfectly competitive industry? Why?

4. Is Total Surplus (that is, Consumer Surplus plus Producer Surplus) higher or lower if

electricity is produced by a single monopolist rather than in a perfectly competitive

industry? Why?

5. Using the tools of economic analysis, now conduct some cost/benefit analysis. When

would you prefer a monopolist producer of electricity rather than a perfectly competitive

industry? Why?