Problem
Suppose that our local power station burns coal to generate electricity. The demand and supply functions for electricity are given by P = 12-0.5Q and P = 2+0.5Q, respectively. However, for each unit of electricity generated, there is an externality. When we factor this into the supply side of the market, the real social cost is increased, and the supply curve is P = 3+0.5Q.
(a) Find the free market equilibrium and illustrate it geometrically.
(b) Calculate the efficient (i.e. socially optimal) level of production.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.