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Suppose that our local power station burns coal to generate electricity. The demand and supply functions...

Suppose that our local power station burns coal to generate electricity. The demand

and supply functions for electricity are given by P = 12−0.5Q and P = 2+0.5Q, respectively.

However, for each unit of electricity generated, there is an externality. Suppose MEC = 1.

(a) Find the free market equilibrium and illustrate it geometrically.

(b) Calculate the efficient (i.e. socially optimal) level of production.

(c) Calculate the deadweight loss.

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