Suppose China wishes to reduce the amount of air pollution generated by electrical plants. The marginal...

Suppose China wishes to reduce the amount of air pollution generated by electrical plants. The marginal benefit of electricity is P = 464, 000 − 200Q and the producers’ marginal cost is P = 32, 000 + 70Q. The air pollution presents a negative externality and the marginal external cost of each unit is P = 75.6Q.

1. In the market equilibrium, what is the total cost of the pollution externality?

2. In the socially optimal outcome, what is the total cost of the pollution externality?

3. Is producer surplus higher at the market equilibrium or at the socially optimal outcome?

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Expert Solution

Rahul Sunny answered 1 year ago

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