Question

Table 1 shows the demand schedule for electricity from a coal burning utility. Table 2 shows the​ utility's cost of producing electricity and the external cost of the pollution created.    If the government levies a pollution tax such that the utility generates the efficient quantity of​ electricity, calculate the quantity of electricity​ generated, the price of​ electricity, the size of the pollution​ tax, and the tax revenue. The quantity of electricity generated is nothing kilowatts a day and the price of electricity is nothing cents a kilowatt.

Price	Quantity demanded
​(cents per​ kilowatt)	​(kilowatts per​ day)
4	500
8	400
12	300
16	200
20	100
24	0

   

Table 2

Quantity ​(kilowatts per​ day)	Marginal cost	Marginal external cost
	​(cents per​ kilowatt)
0	0	0
100	2	2
200	4	4
300	6	6
400	8	8
500	10	10

Answer 1

The quantity of electricity generated is 300 kilowatts a day and the price of electricity is 12 cents a kilowatt.

EXPLANATION: The tax will be calculated as an amount equal to the amount of the marginal external cost at an efficient rate of 6 cents per kilowatt. The quantity is 300 kilowatts per day, a point at which the marginal social cost, 12 cents per kilowatt, is equal to the marginal social benefit (the price of the demand curve, also 12 cents). The government will earn a revenue of 6 cents per kilowatt * 300 kilowatts per day, which equals $18 per day