The demand for electricity in some large community
Course:- Business Economics
Reference No.:- EM131099357

Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Business Economics

A. Suppose the demand for electricity in some large community is given by the following demand function P = 1200 – 0.4Q. If the supply function is given by P = 400 + 0.6Q. These are both private market valuations. Electricity generation is given for both functions in thousands of kilowatts, and involves the emission of sulfur dioxide into the atmosphere which has been linked to the prevalence of acid rain in the area. The marginal external damage associated with the harmful effects to the community from acid rain is $50 per thousand kilowatts generated.

1. What is the market determined quantity of electricity that will be generated in this community? What is the market price?

2. What is an externality? How does the association of sulfur dioxide emission with electricity generation affect the efficiency of the market generated allocation?

3. Provide a graph model of the market allocation and the externality described in this market clearly demonstrating the correct outcomes from part (1) and part (2).

4. Explain why the private solution provided by the Coase Theorem may not be applicable for resolving this problem.

5. Suppose the government imposes a Pigovian tax on electricity generators equal to $800 per thousand kilowatts generated. Discuss first what such a policy means intuitively, and second, why that is not an efficient solution to the problem.

6. Assuming that tradable permits are not feasible as a policy instrument in this economy, describe a market based policy instrument that might be successfully implemented in this community by the government that would address efficiently the externality. (Provide the exact policy recommendation and explain why it maximizes society’s net benefit)

7. Demonstrate using the analytics of consumer, producer and total surplus, why the market allocation is inefficient and how the correct policy implemented achieves efficiency (i.e. provide a welfare economics numerical explanation for the correct answer to part (6)

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Business Economics) Materials
When the price of natural gas is 3.71 per mcf, an average household uses 4.67 mcf. When the price of natural gas is 4.58, an average household uses 3.52 mcf. Calculate the int
Suppose the price elasticity of demand for gasoline at the pump is 0.67. About how big a price increase will be required to decrease consumption of gasoline by 4 percent?
Note from the table that when the professor announced that the textbook would be required, the buyer value for each of the buyers increased by $8. According to the model of su
Susan Chen is a stock analyst. She values two goods: money (income) and her integrity. Her bonus is based on the number of investments she recommends to the company. Generally
Economies of scale and dis-economies of scale? What do these terms mean, when do they occur and how do they differ? Can you provide an example of economies and scale and dis-e
The title Where Angels Fear to Tread is taken from Alexander Pope’s An Essay on Criticism. What is the full quotation and what does it mean? How does this phrase describe the
What are the implications of this statement, “Inflation is a serious problem that should be avoided at all costs.” Is knowing this information important in the world of busine
We grow wheat that sells for $40,000. The wheat is milled into flour that sells for $55,000. The flour is used to bake bread that sells to consumers for $90,000. If nGDP is $9