Economics 3B03— Assignment 3 Paper

Economics 3B03— Assignment 3 Paper

Question
	
Answer all questions.
1. Consider an economy in which the demand for electricity isqd = 100pwhere 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 areqn = 2pqr = p
where qn and qr are the quantities supplied by the nuclear and renewablesectors.
(a) Suppose that there is no government intervention. Find the equilibrium price of electricity. Find the quantity sold by the nuclear sectorand the quantity sold by the renewable sector. Find consumer surplus, the producer surplus of the nuclear sector, the producer surplusof the renewable sector, and total surplus.
(b) Now imagine that the government, wishing to encourage renewablepower, introduces a new policy. It will pay the renewable sectora price of $40 for electricity. It will purchase from the renewablesector 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 (orequilibrium) price. Find the quantity sold by the nuclear sector andthe quantity sold by the renewable sector. Calculate the cost of theprogram to the government. Find consumer surplus, the producersurplus of the nuclear sector, the producer surplus of the renewablesector, and total surplus.
2. Assume that the demand for electricity isq D = 1202pD
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 andrenewable. The supply curve for renewable power isqR = pS
R
1
where qR and pS are the quantity supplied and the price received by sellersRin the renewable sector. The supply curve for nuclear power isqN = 2pSN
where qN and pS are the quantity supplied and the price received byNsellers 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 ofelectricity generated by the nuclear sector, and simultaneously placesa 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 bythe …rm. Find the welfare cost of the program.
3. A …rm’ total costs c ares
c = 4q 2
where q is the level of output. It can sell any number of units of output at aprice 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 anagreement with its neighbours, what would its output be? Supposethat the neighbours negotiate with the …rm. To what output wouldthe 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 absenceof an agreement between the …rm and its neighbours, what wouldthe level of output be? If an agreement is negotiated, what are thelargest and smallest payments that the …rm would have to pay?
(c) Assume that the …rm has the property rights. If the governmentwishes to control the externality by imposing a tax, what would thetax be? How much revenue would it collect?