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Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $700. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $700 per unit. ? PRICE (Dollars per unit of electricity) 2000 1800 1600 1400 1200 1000 800 600 400 200+ 0 0 1 2 4 5 QUANTITY (Units of electricity) 3 The market equilibrium quantity is 3.5 6 Supply (Private Cost) Demand (Private Value) H 7 Social Cost units of electricity, but the socially optimal quantity of electricity production is To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a subsidy units. $500 OF

Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $700. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $700 per unit. ? PRICE (Dollars per unit of electricity) 2000 1800 1600 1400 1200 1000 800 600 400 200+ 0 0 1 2 4 5 QUANTITY (Units of electricity) 3 The market equilibrium quantity is 3.5 6 Supply (Private Cost) Demand (Private Value) H 7 Social Cost units of electricity, but the socially optimal quantity of electricity production is To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a subsidy units. $500 OF

Exploring Economics
Exploring Economics
8th Edition
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:Robert L. Sexton
Chapter8: Market Failure
Section: Chapter Questions
Problem 2P: Draw a standard supply and demand diagram for televisions, and indicate the equilibrium price and...
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Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $700. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $700 per unit. PRICE (Dollars per unit of electricity) 2000 1800 1600 1400 1200 1000 800 600 400 200 O 1 4 5 QUANTITY (Units of electricity) 2 3 The market equilibrium quantity is 3.5 6 Supply (Private Cost) Demand (Private Value) Social Cost (?) units of electricity, but the socially optimal quantity of electricity production is To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a subsidy units. of $500 per
Transcribed Image Text:Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative externality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit external cost of $700. The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $700 per unit. PRICE (Dollars per unit of electricity) 2000 1800 1600 1400 1200 1000 800 600 400 200 O 1 4 5 QUANTITY (Units of electricity) 2 3 The market equilibrium quantity is 3.5 6 Supply (Private Cost) Demand (Private Value) Social Cost (?) units of electricity, but the socially optimal quantity of electricity production is To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a subsidy units. of $500 per
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