A power plant releases an unpleasant odor into the local environment. This market is perfectly competitive, and the plant does not consider the damages imposed on local citizens in terms of lower air quality. The market can be characterized by the following equations: MPB = 800 - 0.5Q MPC = 80 + 0.3Q MEC = 0.4 Q a) Find the competitive equilibrium price and quantity, Qc and Pc. b) Find the socially optimal (or efficient) price and quantity, Qe and Pe. c) Provide a geographical depiction of the competitive and socially optimal solutions. Make sure you label the graph focusing on the following items: units of each axis, labels of curves (MPC, MPB, MSB, MSC), competitive equilibrium price and quantity, and socially optimal price and quantity. d) Analytically derive the social welfare gains from internalizing the externality AND illustrate this welfare gain on the figure you created in part (c). e) Suppose the plant owns the property rights to local air and it is negotiating with a private environmental group that is willing to pay the plant to produce less output. For the 700th unit of output, determine the range within which a payment would be acceptable to both parties.
A power plant releases an unpleasant odor into the local environment. This market is
MPB = 800 - 0.5Q
MPC = 80 + 0.3Q
MEC = 0.4 Q
a) Find the competitive
b) Find the socially optimal (or efficient) price and quantity, Qe and Pe.
c) Provide a geographical depiction of the competitive and socially optimal solutions. Make sure you label the graph focusing on the following items: units of each axis, labels of
d) Analytically derive the social welfare gains from internalizing the externality AND illustrate this welfare gain on the figure you created in part (c).
e) Suppose the plant owns the property rights to local air and it is negotiating with a private environmental group that is willing to pay the plant to produce less output. For the 700th unit of output, determine the range within which a payment would be acceptable to both parties.
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