Answered: Assume the government places an optimal…

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter11: Public Goods And Common Resources

Section: Chapter Questions

Problem 2PA

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Pollution from the bright city lights makes it nearly impossible to stargaze within a city setting. The supply (private cost) and demand for electricity used in city lighting are shown in the graph.

Suppose the external cost for an additional kilowatt hour of electricity is 5 cents. Drag the endpoints of the green line to draw in the social cost (private cost and external cost) curve for electricity. Place point O at the point corresponding with the socially optimal quantity and price for electricity.

Price of electricity (cents per kWh)Quantity of electricity (kWh)01020304050SupplyDemandOSocial cost of light pollution

Assume the government places an optimal Pigouvian tax on electricity used at night to reduce light pollution so that people can enjoy the stars.

As a result of the Pigouvian tax,

consumers pay a higher price for electricity at night and producers increase output.

consumers pay a lower price for electricity and producers also lower output.

consumers pay a higher price for electricity and producers lower output.

consumers pay a lower price for electricity and producers increase output.

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