Questions.
1. Consider an economy in which the demand for electricity is qd = 100p where qd is the quantity demanded and p is the price measured in dollars. There are two sources of electricity supply: nuclear power and renewablepower (wind and solar). The supply curves of these two sectors are qn = 2p qr = p
where qn and qr are the quantities supplied by the nuclear and renewable sectors.
(a) Suppose that there is no government intervention. Find the equilibrium price of electricity. Find the quantity sold by the nuclear sector and the quantity sold by the renewable sector. Find consumer surplus, the producer surplus of the nuclear sector, the producer surplus of the renewable sector, and total surplus.
(b) Now imagine that the government, wishing to encourage renewable power, introduces a new policy. It will pay the renewable sector a price of $40 for electricity. It will purchase from the renewable sector as much electricity as the sector is willing to sell at this price, and then resell it at the market price. Find the new market (or equilibrium) price. Find the quantity sold by the nuclear sector and the quantity sold by the renewable sector. Calculate the cost of the program to the government. Find consumer surplus, the producer surplus of the nuclear sector, the producer surplus of the renewable sector, and total surplus.
2. Assume that the demand for electricity is q D = 120 2pD
where q D and pD are the quantity demanded and the price paid by buyers. As before, there are two kinds of electricity providers, nuclear and renewable. The supply curve for renewable power is qR = pS
where qR and pS are the quantity supplied and the price received by sellers R in the renewable sector. The supply curve for nuclear power is qN = 2pS N
where qN and pS are the quantity supplied and the price received by N sellers in the nuclear sector.
(a) Assume that there is initially no government intervention in the market for electricity. Find the total surplus in the market for electricity.
(b) Now imagine that the government places a tax of $1 on each unit of electricity generated by the nuclear sector, and simultaneously places a subsidy of $2 on each unit of electricity generated by the renewable
sector. The tax is paid by the ...rm, and the subsidy is received by the ...rm. Find the welfare cost of the program.
3. A ...rm' total costs c are s
c = 4q 2
where q is the level of output. It can sell any number of units of output at a price of 64.However, production depicts damage on the .rm' neighbours.
The total damage Depiicted depends on the ...rm' output: D = 4q + q 2
(a) Assume that the ...rm has the property rights. In the absence of an agreement with its neighbours, what would its output be? Suppose that the neighbours negotiate with the ...rm. To what output would the negotiations lead? What is the minimum payment that the neighbours must make to the ...rm to achieve this change in output? Whatis the maximum payment?
(b) Assume that the neighbours have the property rights. In the absence of an agreement between the ...rm and its neighbours, what would the level of output be? If an agreement is negotiated, what are the largest and smallest payments that the ...rm would have to pay?
(c) Assume that the ...rm has the property rights. If the government wishes to control the externality by imposing a tax, what would the tax be? How much revenue would it collect?