Question: Hello, I only need help with e. of this equation. However, I have linked the whole problem to help Consider a coal-fired electricity plant that
Hello, I only need help with e. of this equation. However, I have linked the whole problem to help
Consider a coal-fired electricity plant that generates air pollution. The air pollution from the production process negatively affects the health of young children living nearby (side note: young children are generally more susceptible to air pollution than older children and adults). For each unit of electricity produced, suppose the marginal damages are $12. Suppose demand for electricity is Q=1200-4P and supply is Q=-240+2P.
a. What is the private market equilibrium quantity?
b. What is the social efficiency maximizing quantity?
c. Portray the market on a P-Q graph, being sure to label relevant intercepts and curves (PMB, D, SMB, PMC, S, SMC).
d. Calculate the deadweight loss and shade it in on the graph from part (c).
e. (Answer this part only) Now suppose the government wants to set electricity production to the social efficiency maximizing quantity using a quantity mandate. As we discuss in class, it is often difficult to correctly calculate marginal damages and the government overestimates the damages to be $18. What level of production would the government think is socially optimal? If the government mandates that the electricity factory produces at that level, what would be the new amount of deadweight loss?
Thank you
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