Questions: 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 MC external MC social --------------- 0.5 145 85 20 105 1.0 130 90 20 110 1.5 115 95 20 115 2.0 100 100 20 120 2.5 85 105 20 125 3.0 60 110 20 130 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 "private quantity" of electricity Texarkana Electric Company will 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
Transcript text: 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
\begin{tabular}{|c|c|c|c|c|c|c|}
\hline Quantity (millions of megawatts) & MBprivate & MCprivate & \multicolumn{2}{|l|}{MC external} & \multicolumn{2}{|r|}{MC social} \\
\hline 0.5 & \$145 & \$85 & \$ & 20 & \$ & 105 \\
\hline 1.0 & 130 & 90 & & 20 & & 110 \\
\hline 1.5 & 115 & 95 & & 20 & & 115 \\
\hline 2.0 & 100 & 100 & & 20 & & 120 \\
\hline 2.5 & 85 & 105 & & 20 & & 125 \\
\hline 3.0 & 60 & 110 & & 20 & & 130 \\
\hline
\end{tabular}
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 "private quantity" of electricity Texarkana Electric Company will produce each year?
$\square$ 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 ( $M C_{\text {external }}$ ) and the social marginal $\operatorname{cost}\left(M C_{\text {social }}\right.$ ) 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?
$\qquad$ million megawatts per year
Solution
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