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Question

Texarkana Electric Company burns coal to heat the water that drives its electricity-producing turbines. The

table below shows the marginal benefit of annual electricity consumption and the private marginal cost of annual electricity production.

 

Screenshot_2019-05-05 Practice Market Dynamics and Efficiency Quiz - Unlimited Attempts.png

Instructions: Enter your answers as a whole number.

 

a. What is the (apparent) optimal amount of electricity for Texarkana Electric Company to produce each year?

 

   million megawatts per year

 

Now assume the production of each million megawatts of electricity also produces sulfur dioxide (a precursor to acid rain). The external cost of the sulfur dioxide is $20 per million megawatts of electricity production. 

 

b. Fill in the external marginal cost (MCexternal) and the social marginal cost (MCsocial) columns in the table above.

 

c. What is the socially optimal amount of electricity for Texarkana to produce if all costs and benefits are considered?

 

     million megawatts per year

 

Screenshot_2019-05-05 Practice Market Dynamics and Efficiency Quiz - Unlimited Attempts.png

Marginal Cost and Marginal Benefit
Quantity (millions of
megawatts)
MBprivateMCprivateMCexternal
MCsocial
1 .0
$145
$85
$
2 . 0
130
90
3 . 0
115
95
4 .0
100
100
5 . 0
85
105
6 . 0
60
110

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