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Question - Texarkana Electric Company burns coal to heat the water that drives 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
1.0
$145
$85
2.0
130
90
3.0
115
95
4.0
100
5.0
85
105
6.0
60
110
a. What is the (apparent) optimal amount of electricity to produce each year?
b. The production of each million megawatt of electricity also produces sulfur dioxide (a precursor to acid rain). The external cost of the sulfur dioxide is $20 per million megawatt production of electricity.
Fill in the external marginal cost (MCexternal) and the social marginal cost (MCsocial) columns in the table above.
c. What is the socially optimal amount of electricity to produce if all costs and benefits are considered?
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