Reference no: EM133064095
"China power cuts: What is causing the country's blackouts?" by: Peter Hoskins, BBC News, September 30, 2021. < https://www.bbc.com/news/business-58733193> Blackouts are not that unusual in the country but this year a number of factors have contributed to a perfect storm for electricity suppliers. [...] As the world starts to reopen after the pandemic, demand for Chinese goods is surging and the factories making them need a lot more power. Rules imposed by Beijing as it attempts to make the country carbon neutral by 2060 have seen coal production slow, even as the country still relies on coal for more than half of its power. And as electricity demand has risen, the price of coal has been pushed up. But with the government strictly controlling electricity prices, coal-fired power plants are unwilling to operate at a loss, with many drastically reducing their output instead.
As you see, the reasons for blackouts are: a production quota in the coal market (and otherwise leaving the price to be determined by market forces), yet imposing a price ceiling in the electricity market. Assume that the demand for electricity is given by ?? ?? = 100,000 - 10??, where quantity is measured in Kilowatt-hours (kWh), and price in Yuans (¥). The supply of electricity is given by ?? ?? = -10,000 + 100??.
a. What would be the perfectly competitive price of a kWh and the quantity consumed of electricity?
b. What is the CS, PS, NEB without the intervention of the government in the electricity market?
c. Assume the price ceiling imposed by the government is ¥200. What is the CS, PS, the shortage in electricity, and the deadweight loss caused by this intervention? What is the share of electricity supplied now from its optimal level (of perfect competition)? The government can improve the situation by supporting the coal industry (access to new sources, lifting quotas, subsidizing coal producers, etc.) and/or by lifting the electricity price ceilings and/or by subsidizing electricity producers.
d. Assume the government wants to keep the price at the current level of ¥200, but wants to subsidize electricity producers by a ?? Yuan per kWh, such that it fulfills all the current market demand for electricity at this low price of ¥200. What is T? e. What is the DWL caused by this subsidy (compared to perfect competition)? Is it better or worse than setting a price ceiling?