Question

2. The first two columns of the table show the demand schedule for electricity from a coal-burning power station; the second and third columns show the power station's cost of producing electricity. The marginal cost of pollution created is equal to 6 cents per kilowatt th a) With no pollution control, what is the quantity of electricity produced, the price of electricity and the marginal extermal cost of the pollution generated? (5 marks) b) Suppose that the government levie ollution tax, such that the power station produces the efficient quantity. What are the price of electricity, the tax , the tax per day and the quantity of electricity produced? (5 marks) Price Quantity Marginal cost (cents per kilowatt) -(kilowatts per day) (cents per kilowatt) 10 12 16 20 500 400 300 200 100

Answer 1

a) With no pollution control, the coat - burning power station will produce that level of electricity, such that marginal cost of electricity equal its price. Clearly, the station produces 400 kilowatts of electricity per day, as at this level, the marginal cost and price are equal to 8 cents per kilowatt. therefore Quantity of electricity produced = 400 kilowatts per day. Price of electricity = 8 cents per kilowatt. Marginal external cost of pollution generated = 6 cents per kilowatt \r\n b) The power station will produce the efficient quantity, when the social marginal cost, i.e, the sum of marginal cost of the station and the marginal cost of pollution will equal to price of electricity. Clearly, 300 kilowatts per day is the efficient quantity, as at this level, Social Marginal Cost = Marginal Cost + Marginal Cost of pollution = 6 + 6 = 12 cents per kilowatts