(Solved): Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby riv ...

Consider the market for electricity. Suppose that a power plant dumps byproducts into a nearby river, creating a negative extermality for those living downstream from the plant. Producing additional electricity imposes a constant per-unit extemal cost of \( \$ 160 \). The following graph shows the demand (private value) curve and the supply (private cost) curve for electricity. Use the purple points (diamond symbol) to piot the sacial cost curve when the external cost is \( \$ 160 \) per unit. The market equilibrium quantity is units of electricity, but the socially optimal quantity of electricity production is units. To create an incentive for the firm to produce the socially optimal quantity of electricity, the government could impose a per unit of electricity.