energy economics final exam 7-12 homework

In a market demand and supply equations are: The demand curve is given as: P = 45 - 3Q The supply curve is given as: P = 5 + 2Q. 1) What are the market competitive equilibrium price and quantity (P* and Q*), Consumer Surplus (CS), and Producer Surplus (PS) without government intervention ? Assume government imposes Price Cap of $15 on the market: 2) What would be the new equilibrium quantity in the market? 3) What would be the market Consumer Surplus and Producer Surplus? 4) What would be the Hidden Cost? 5) What would be the Deadweight Loss?

Dear students, Some of you are asking about the second part of question 3 in lesson 8 and 9 Homework. Q(s): The supplied quantity, Q(s), in the market is where Price Cap line of PC=$15 intersects the supply curve and can be determined by setting price in supply equation equal to 15 and solve the equation for Q. Please look at the last graph in section "Price Controls and Their Effects". PR: PR (Real Price) is the price corresponding to supplied quantity, Q(s), in the market. It's where vertical line of Q(s) intersects demand curve. To find PR, you need to substitute the quantity supplied of Q(s) in the demand equation. Please let me know if you have any question. Farid Feedback: 1) 45 - 3Q = 5 + 2Q 45 - 5 = 3Q + 2Q 40 = 5Q Q = 40/5 then Q* = 8 By substituting Q* in demand or supply equation P* can be calculated: P* = 45 - 3Q* = 45 - 3x8 = 45 - 24 = 21 Then, at market equilibrium without government intervention: P* = 21 Q* = 8 Consumer surplus is the area between the price line (P=21) and the demand line. The top of the triangle is the spot on the demand curve where Q=0, which is P=45. CS=(45-21)*8/2=96. Producer surplus is the area between the price line (P=21) and the supply line. At Q=0, P equals 5 then the side of the triangle has length of 21 - 5 = 16. PS=(21-5)*8/2=64 2) By setting supply equal to 15 we can calculate the quantity supplied in the market: 15 = 5 + 2Q Q(s) = (15 - 5)/2 = 5 3) The consumer surplus is the area of the blue trapezoid between the demand curve, Price Cap (PC = 15), and quantity supplied (Q(s) = 5) area of the red trapezoid will be (length of larger base + length of smaller base)*height*1/2: length of larger base = 45 - 15 = 30 length of smaller base: PR - PC PR: By substituting quantity supplied (Q(s)) in demand equation, PR = 45 - 3*5 = 45 - 15 = 30 So, length of smaller base: PR - PC = 30 - 15 = 15 height = Q(s) = 5 area of the red trapezoid = (30 + 15) x 5 x (1/2) = 112.5 CS = 112.5 Producer surplus is the area between the Price Cap line (PC=15) and the supply line (red triangle). At Q=0, P equals 5 then the side of the triangle has length of 15 - 5 = 10. PS=(15-5)*5/2=25 4) Hidden Cost can be calculated by determining the area of yellow rectangle: area of yellow rectangle = (PR - PC) * Q(s) = (30 - 15) * 5 = 15 * 5 = 75 5) Deadweight Loss equals the area of green triangle area of green triangle = (PR - PC) * (Q* - Q(s))/2 = (30 - 15) *(8 - 5) /2 =15*3/2 = 22.5

Please explain the following terms: 1) NERC 2) Renewable portfolio standard 3) Capacity factor

Feedback: NERC: The North American Electric Reliability Corporation (NERC) was established to ensure that the grid in the United States was reliable, adequate, and secure. Some NERC members have formed regional organizations with similar missions. Renewable portfolio standard: A certain portion of the power sold to end users in a state must come from renewable sources. Capacity factor: The capacity factor is the average hourly output as a fraction of the maximum possible output, so if a plant was running all of the time, its capacity factor would be 100%, if it ran half of the time, 50%, and so on

Please briefly explain four of the critiques that Mendelsohn mentioned about the assumptions in Stern Report.

Feedback: The Stern Report makes strong assumptions that cause the estimated damages from climate change to be much higher than previously thought. Demographics The report examines only one baseline of demographic change over the next two centuries. Discount rate The report assumes that the discount rate (the "price" of time) for the cost of global change is 0.1 percent above the rate of growth of consumption. Adaptation Although there are several chapters in the report that talk about the importance of human adaptation to climate change, the damage estimates in the analysis do not take adaptation into account Extreme Weather The Stern Report assumes that climate change causes extreme weather events such as hurricanes Non-Market Damages The Stern Report assumes that the non-market damages of climate change are very large. Knock-on Damages The report assumes the large damages from climate change will cause additional "knock on" damages. Uncertainty The Stern Report assumes that a risk premium should be added to damages because the report estimates there are large uncertainties surrounding the damages of climate change. Equity The report advocates adding an equity weight that automatically increases damages that happen to poor people.

Please briefly explain the following terms: 1) Hubbert Curves in producing oil 2) Resource Curse

Feedback: 1) "Peak oil" refers to the idea that the production of oil from an individual well, when plotted against time, approximately follows the shape of a normal distribution, whereby it starts low, increases to a maximum value at a peak, and then declines in a symmetrical fashion. The idea that oil production follows such a function was developed by a geologist named M. King Hubbert, and as such are called "Hubbert Curves". 2) The term resource curse represents an economic phenomenon associated with the abundance of natural resources in certain countries. The term summarizes a paradox that those naturally gifted resource countries do not always develop and grow their economies. It should be understood that if a country has a significant resource allocation, it should use them to their advantage. However, this has not always been the case in many countries with large reserves of resources. In fact, some studies reveal that such resource abundance has been pernicious to countries who own them. It is the meaning of what is termed the "resource curse." The term might seem to indicate that the resources themselves are generating the curse. Studies show that the curse comes not in the good as such, but in the use made of them and the conditions of the country, its people, institutions and authorities that have received plenty of resources.

Please explain the following economic terms: 1) Proved reserves 2) Resource pessimism

Feedback: 1) According to textbook, "Specific mineral deposits that have been shown by scientific examination and cost calculation to be extractable and deliverable to the market for use, with current technology and expected market conductions." Specific mineral that is technologically and economically feasible to be produced and delivered to the market with present technology. Advances in technology and higher future prices can increase the proved reserves. 2) Malthusianism is a strain of what is called "resource pessimism", the general idea that we are forever close to running out of something important, and dooming humanity to either a wretched existence or a miserable end. It is sometimes referred to as "doom-saying".

What are the three basic problems of renewable energy, please briefly explain?

Feedback: 1) Capital costs are very high. The problem with all of renewable energy is that it is at a very low concentration - it is broadly spread out. The high capital costs make it difficult for investors to earn a good return on such facilities. 2) Resources are located far from people. If we wish to build lots of wind and solar in these thinly-populated places, we will have to build lots of transmission to move this power to population centers, and this is also a very expensive, bureaucratic and politically difficult proposition. 3) Resources are not controllable. The problem with wind and solar is that they are not dispatchable - they cannot be turned on and off at will by power system operators. Another complicating factor: wind tends to blow the most early in the morning hours, and mostly in the spring and fall. These happen to be times when the demand for electricity is at its lowest.

Please explain the following economic terms in detail: 1) Rational ignorance 2) Government failure

Feedback: 1) When the cost of acquiring information is greater than the benefits to be derived from the information, it is rational to be ignorant. For example: lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election. 2) Government failure is generally described as "when the government tries to correct a market failure - a loss in the aggregate welfare of society - but ends up creating a larger loss of aggregate social welfare instead."

Please explain in detail the following price control policies and describe the problems in each case. 1) Price ceiling 2) Price floor

Feedback: A price control comes in two flavors: a price ceiling, where the government mandates a maximum allowable price for a good, and a price floor, in which the government sets a minimum price, below which the price is not allowed to fall. 1) In situations where it is felt that the price is artificially high because of a lack of competition, one of the actions a government can take is to set a maximum price a monopolist can charge. A price ceiling must be lower than P* (competitive market equilibrium price) in order for it to have any effect. In this case, the quantity supplied, Q(d), is lower than the quantity demanded, Q(s), that gave us unsatisfied demand. Price ceilings may set a limit on cash costs of goods, but people will still compete for them until the marginal cost = marginal utility. This means there will be hidden, non-cash costs that will exist, such as standing in line (or paying people to do so for you), under-the-table payments, influence peddling, black markets, smuggling, and so on. Because quantity demanded is higher than quantity supplied, buyers have incentive to make under the table payments to secure their purchase of the good. Given the cash prices are usually lower than market equilibrium prices, the supply will usually be lower than free-market supply, meaning that there will be fewer goods available, at a higher "all-in" (cash + hidden) cost, and a large deadweight loss. And lower-income people will generally be less able to pay this higher cost. 2) Sometimes, a government wants to help producers by setting a minimum price below which people are not allowed to buy or sell. This is like the price cap in reverse and called price floor. A price floor must be higher than P* (competitive market equilibrium price) in order for it to have any effect. In this case, the quantity demanded, Q(d), is lower than the quantity supplied, Q(s). There will be more people who want to sell than people who want to buy. In this case, instead of consumers competing to buy, the producers will compete to sell while they are forbidden from lowering their cash price below the official floor price. So, instead, they have to find other ways to compete with each other, such as: giving better service (while less people can buy the good), "under the table" at prices below the "official" price and entering a "black market" situation.

What are the renewable sources of power generation? Please briefly explain.

Feedback: Hydropower, the source of almost 6% of U.S. electricity generation in 2013, is a process in which flowing water is used to spin a turbine connected to a generator. Wind power is produced by converting wind energy into electricity. Electricity generation from wind has increased significantly in the United States since 1970. Wind power provided about 4% of U.S. electricity generation in 2014. Biomass is material derived from plants or animals and includes lumber and paper mill wastes, food scraps, grass, leaves, paper, and wood in municipal solid waste (garbage). Biomass is also derived from forestry and agricultural residues such as wood chips, corn cobs, and wheat straw. These materials can be burned directly in steam-electric power plants, or they can be converted to a gas that can be burned in steam generators, gas turbines, or internal combustion engine-generators. Biomass accounted for about 2% of the electricity generated in the United States in 2014. Geothermal power comes from heat energy buried beneath the surface of the earth. In some areas of the United States, enough heat rises close enough to the surface of the earth to heat underground water into steam, which can be tapped for use at steam-turbine plants. Geothermal power generated less than 1% of the electricity in the United States in 2014. Solar power is derived from energy from the sun. Photovoltaic (PV) and solar-thermal electric are the two main types of technologies used to convert solar energy to electricity. PV conversion produces electricity directly from sunlight in a photovoltaic (solar) cell. Solar-thermal electric generators concentrate solar energy to heat a fluid and produce steam to drive turbines. In 2014, less than 1% of U.S. electricity generation came from solar power.

What is Dutch Disease Effects and how can it lead to lower economic growth rates?

Feedback: The term "Dutch disease" describes a phenomenon by which the abundance of natural resources in a country becomes in a disadvantage instead of being something from which the country could benefit through the commerce. The term arises from what happened to the economy in the Netherlands after large amounts of natural gas was produced in that country in the late 1960s and early 1970s. According to World Bank authors, Dutch disease results where, "In places where natural resources are abundant—that is, where they can be produced at low cost, relative to the marginal cost of production elsewhere—they generate large profits (economic rents) for the owners. This has two major effects on the relative incentive structure in the economy. First, to the extent the resources are exported, the inflow of foreign exchange appreciates the real exchange rate: that is, it raises the price of non-tradable goods relative to that of tradable goods. Second, it increases the returns to production of the resource relative to other tradable goods. Both of these effects reduce the incentive to invest in production of other tradable goods, resulting in a production and export structure concentrated in the resource. (Sinnott, Nash, & De la Torre, 2010)

Are the following things public goods? Why or why not? a) A golf course b) A free (non-tolled) bridge across the Delaware River c) An orange d) Signals from a radio station

Feedback: for a good to be considered public, it must be (a) non-rival and (b) non-excludable. a) A golf course: Not a public good: is exclusive. However, unless the course is crowded, it is non-rivalrous. b) A free (non-tolled) bridge over the Delaware River: Not exclusive. Barring congestion effects, this is a public good. However, when heavily congested it is a rival good. c) An orange. Not a public good. Exclusive. Not a non-rival good. d) Signals from radio stations. Radio signals are public goods, nonexclusive and non-rivalrous.

Please briefly explain the Waxman-Markey bill.

Feedback: Any action concerning ratification of the Kyoto treaty was voted down 95-0 in the US Senate in 1997. However, 12 years later, in 2009, a bill was passed through the House of Representatives, containing greenhouse gas (GHG) standards on vehicles and implementing a carbon cap and trade policy for large stationary emitters. This was called the Waxman-Markey bill (officially titled the American Clean Energy and Security Act). This bill proved to be very unpopular with some parts of the American populace, and, as such, an accompanying bill was never introduced in the Senate, and it is unlikely that one will be before this session of Congress ends in 2012.

Describe the interactions between intergenerational equity and uncertainty in the context of climate change.

Feedback: Intergenerational equity refers to "fairness" across generations, or across time. It basically means that people today should not do things that make the world a worse place for future generations. By the same token, current generations should not disadvantage themselves for future generations needlessly - there has to be some concrete benefit for doing so, or at least the knowledge of such a benefit. Given that the future is unwritten, and that the state of future technologies is unknown, it is difficult for us today whether our actions today are harming or benefitting future generations, or are simply damaging today's economy needlessly, given that our ancestors may have technology that enables them to deal with climate change at a much lower cost than we can today.

What are the opportunity costs of slowing global warming by reducing carbon dioxide emissions?

Feedback: The primary opportunity cost will be the reduction in economic activity created by the reduction in carbon dioxode emissions, which are quite strongly tied to GDP. This may be a small opportunity cost, and possibly a net benefit in the long run, but it will be a cost in the near term.

What kind of "economic problem" can climate change be characterized as? What type of good is "climate change abatement"?

Feedback: This can be thought of as an externality issue: the disposal of carbon dioxide into the atmosphere will be likely to have effects on people who are not involved in the economic activity that created the carbon emissions.Climate change abatement is a public good, in that it will tend to be under-supplied by a free market, as the benefits will be non-rival and non-excludable. As such, abatement has to be "supplied" by the government, usually in the form of emissions limits, or taxes.

Regarding the course materials about Resource Scarcity, please explain why Simon won the bet, although the demand for each of five selected metals increased over the period 1980-1990.

Feedback: This is the result of two things: an outward movement of the demand curve coupled with a downward movement of the supply curve. A downward movement of the supply curve means that the cost of producing something has dropped. In this case, the costs of producing each of those metals fell, primarily due to improvements in the efficiency of mining technology.

What are the three methods that government can control the emission? Please explain

There are three general ways: 1) Command and Control: governments issue commands in order to control the amount of pollution. If emitters fail to comply with these rules, they face criminal sanction and the possibility of fines and imprisonment. 2) Coasian permit trading: This is a system whereby the government delegates to itself the property right to emit and then sells (or gives away) these property rights. A company needs a permit for every unit of emission they wish to emit into the environment, and the quantity of those permits is controlled by the government. This method has the benefit of allowing firms to trade permits so that firms that have a high cost of emitting can buy rights from firms that can reduce pollution at lower costs, which means that as a society we can have the same amount of pollution reduction as in the command and control method, but at a lower cost to society. This will be illustrated a little later. This method is called "cap and trade" because the government will set a cap on the amount of emission that can be emitted each year and then allow emitters to trade amongst themselves to obtain the socially efficient result. 3) Pigouvian taxes: These are taxes on pollutants, This method contrasts with cap and trade in this way: with a Coasian system, we are setting the socially optimal quantity, and then allowing the price to find the market equilibrium. In theory, this is equivalent to the "social cost", the difference between the two supply curves in our social versus private equilibrium diagram. The good thing is, we do not have to try to figure out this cost, which can be extremely difficult to discover, but instead, we can simply let the market find the level. A Pigouvian tax moves the equilibrium from the private to the social one, but it does so by setting a fixed cost (the tax), and then allowing quantity to adjust in the marketplace. The problem with this system is that it requires more information. If the tax is too high, the quantity emitted will move to a quantity below the socially optimal value, which means that some wealth is destroyed. If the tax is too low, then we will not reduce pollution by very much, and will be producing at a level above the socially optimal amount, which is also not a wealth maximizing situation.