Question

Suppose the demand for electricity is given by P = 100 - 2Q, and the supply...

Suppose the demand for electricity is given by P = 100 - 2Q, and the supply schedule is given by P = 10 +

4Q.

a) Determine the equilibrium P & Q in this market. Calculate CS, PS, and TS.

Now suppose that producing electricity entails emission of pollutants, which generate external costs

constant at $6 per unit.

b) What is the efficient quantity of electricity provision? Calculate TS at this level of provision.

What is the efficiency loss if the market is left to its own devices (part (a))?

c)

What Pigouvian tax could you impose to get the market allocation to be efficient? Show your

work.

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