Question 1. (16 marks) Consider a competitive market for electricity production in which some firms are polluters. Firm A (coal burning): C(xA) = 10xA and . . 1 the environmental cost to sOCIety Is E (36A) = (3943). Firm B (wind power): C(xB) = 40x3 and i) the environmental cost to society is E(x3) = 0. {4 marks) Assume the market operates without any recognition of environmental costs. At what prices will each firm operate? Assume the market demand for the commodity is given by 24000 \"10:7 {4 marks) Find the competitive market equilibrium price and quantity using the firm's supply responses in i) and the market demand above. Are both firms operating? Why? {6 marks) Suppose a planner uses the representative consumer's utility function, to find the socially optimal allocation of resources to the two firms. Choose (xA. x3, 3!) to solve max U(x,y) = (24000)ln(x) + 3? Subject to x = xA + x3, 26;, 2 0 and x3 2 0 and 609,) + C(xB) + 13094) + y = 50,000 What will be the aggregate production level, and how much will each firm supply? {6 marks) Use a pair of sketches of the market and planner allocations (using the market demand/marginal benet curve and cost curves of the firms) to compare the net benefit to society from the outcomes in ii) and iii). Has the planner achieved an increase in net benet? Page 1 of 1