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.

Marginal Cost and Marginal Benefit

Quantity (millions of megawatts)	MBprivate	MCprivate	MCexternal	MCsocial
0.5	$155	$95	$	$
1.0	140	100
1.5	125	105
2.0	110	110
2.5	95	115
3.0	70	120

Instructions: In parts a and b, enter your answers as a whole number. In part c, round your answer to 1 decimal place.

a. What is "private quantity" of electricity Texarkana Electric Company will produce each year?

      million megawatts per year

Now assume the production of electricity also produces sulfur dioxide (a precursor to acid rain). The external cost of the sulfur dioxide increases by $20 for each 0.5 million megawatts produced.

b. Fill in the external marginal cost (MC_external) and the social marginal cost (MC_social) 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

Answer 1

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