4. Depending on whether there is an over-consumption or under-consumption, the government could choose to tax or subsidize the cost of solar roof panels to produce the socially optimal level of consumption. Depending on your answer to question 3, indicate whether a tax or a subsidy would be appropriate in this case. Describe the effect of the tax or subsidy on equilibrium price and quantity and illustrate it on your graph above.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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Answer to question #4
The solar roof panel industry has really taken off in recent years. Homeowners typically will make
the decision whether to purchase solar panels for their roofs based on the price of the solar panel
and the perceived private benefit, which includes lower energy costs of powering their homes.
In addition to the private benefits of solar roof panels, there are also large societal benefits in the
form of reduced dependence on fossil fuels (coal, oil, etc.), which create more pollution than solar
energy sources. Unfortunately, homeowners don't consider these societal benefits when deciding
whether or not to purchase solar roof panels.
1. Assuming perfect competition, use the space below to graph the market for solar roof panels.
The graph does not need to include specific numbers or values but should include:
a) Clearly-labeled x- and y-axis
b) A clearly-labeled supply curve
c) A clearly-labeled private marginal benefit (or demand) curve
d) A clearly-labeled social marginal benefit curve
e) The market equilibrium price and quantity
2. Draw and label the socially optimal quantity of solar roof panels on your graph.
3. Does the market produce an over-consumption or under-consumption of solar roof panels?
Why?
4. Depending on whether there is an over-consumption or under-consumption, the
government could choose to tax or subsidize the cost of solar roof panels to produce the
socially optimal level of consumption. Depending on your answer to question 3, indicate
whether a tax or a subsidy would be appropriate in this case. Describe the effect of the tax
or subsidy on equilibrium price and quantity and illustrate it on your graph above.
Transcribed Image Text:The solar roof panel industry has really taken off in recent years. Homeowners typically will make the decision whether to purchase solar panels for their roofs based on the price of the solar panel and the perceived private benefit, which includes lower energy costs of powering their homes. In addition to the private benefits of solar roof panels, there are also large societal benefits in the form of reduced dependence on fossil fuels (coal, oil, etc.), which create more pollution than solar energy sources. Unfortunately, homeowners don't consider these societal benefits when deciding whether or not to purchase solar roof panels. 1. Assuming perfect competition, use the space below to graph the market for solar roof panels. The graph does not need to include specific numbers or values but should include: a) Clearly-labeled x- and y-axis b) A clearly-labeled supply curve c) A clearly-labeled private marginal benefit (or demand) curve d) A clearly-labeled social marginal benefit curve e) The market equilibrium price and quantity 2. Draw and label the socially optimal quantity of solar roof panels on your graph. 3. Does the market produce an over-consumption or under-consumption of solar roof panels? Why? 4. Depending on whether there is an over-consumption or under-consumption, the government could choose to tax or subsidize the cost of solar roof panels to produce the socially optimal level of consumption. Depending on your answer to question 3, indicate whether a tax or a subsidy would be appropriate in this case. Describe the effect of the tax or subsidy on equilibrium price and quantity and illustrate it on your graph above.
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