Question

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 below.1. Suppose the external cost for an additional kwatt 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 the black dot labeled \"O\" at the point corresponding with the socially optimal quantity and price for electricity.2. 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 higher price for electricity at night and producers increase output. () Consumers pay a lower price for electricity while producers increase output () Consumers pay a higher price for electricity while producers lower output () Consumers pay a lower price electricity while producers also lower output.

Answer 1

The external cost of light pollution from city lighting should be reflected by shifting the supply curve upward, resulting in a higher price and lower output for electricity. A Pigouvian tax increases electricity prices and decreases consumption, leading to reduced light pollution and promoting stargazing.

Step-by-step explanation:

Pollution from city lights represents a negative externality since it imposes a cost on society that is not reflected in the market price of electricity. When considering the external cost of 5 cents per additional kilowatt of electricity for city lighting, we should adjust the supply curve upwards to include this social cost. The social cost curve is therefore above the private cost curve by the amount of the externality.

Applying a Pigouvian tax aims to correct this market failure by increasing the price of electricity to reflect its true social cost. In response to the tax, the demand shrinks as consumers react to the higher price by reducing their consumption, and the producers reduce output since it's now more costly to supply electricity. The new market equilibrium will have a higher price and a lower quantity of electricity demanded and supplied, making the lifestyle of stargazing more attainable and reducing the negative externality of light pollution.

The correct option is: Consumers pay a higher price for electricity while producers lower output.