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	$160	$100	$	$
1.0	145	105
1.5	130	110
2.0	115	115
2.5	100	120
3.0	75	125

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

a. What is the (apparent) optimal amount of electricity for Texarkana Electric Company to 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