1. Market Equilibrium, Producer and Consumer Surplus and Deadweight Loss
The demand and supply of electricity between 2:00 PM and 3:00 PM on a typical summer afternoon in Ontario is given in the table below.
|
Price ($/MWh)
|
Quantity Demanded (MWh)
|
Quantity Supplied (MWh)
|
|
80
|
15,400
|
13,000
|
|
90
|
15,200
|
14,000
|
|
100
|
15,000
|
15,000
|
|
110
|
14,800
|
16,000
|
|
120
|
14,600
|
17,000
|
a. Derive the linear function that fits the demand data.
b. Derive the linear supply function that fits the supply data.
c. What is the equilibrium price and quantity of electricity?
d. Suppose that, in an attempt to provide ‘affordable' electricity to all housing, the regulatory authority imposes a ceiling of $90/Mwh on the price of electricity.
i. How much electricity would be supplied at this price?
ii. How much electricity would be demanded at this price?
iii. What are the consequences?
iv. Assume that the regulator can impose rationing on consumers (e.g., by rotating brown- outs or black-outs) what is the change in consumer and producer surplus, relative to the previous market equilibrium, associated with the policy? (Calculate the dollar amount of the change in consumer surplus and the dollar amount of the change in producer surplus.)
e. Suppose that the Government imposes a tax of $10/MWh.
i. What price and quantity would prevail after the imposition of the tax?
ii. What portion of the tax would be borne by buyers and sellers, respectively.
iii. Calculate the deadweight loss from the tax. Could the tax be justified despite the deadweight loss?
iv. What tax revenue will be generated?
2. Climate Change and "Stabilization Wedges"
Following on papers by Pacala and Socolow,1 The Carbon Mitigation Initiative at Princeton University, http://cmi.princeton.edu/ has summarized carbon stabilization strategies at http://cmi.princeton.edu/wedges/intro.php. For each of the 15 approaches write a short paragraph explaining the most important features of the approach. All explanations must be in your own words. Some will be longer than others, however, the total response to this question must not exceed 1000 words.
3. Market Concentration and the Hirschman-Herfindahl index (HHI)
Suppose the market shares of the top six energy firms in an industry are as follows.
|
Firm
|
A
|
B
|
C
|
D
|
E
|
F
|
|
Market Share
|
20%
|
20%
|
15%
|
10%
|
10%
|
2%
|
Assume that market shares of remaining firms are so small that they contribute negligibly to the Hirschman-Herfindahl index (HHI).
a. Compute the current value of the Hirschman-Herfindahl index.
b. Suppose Firm D proposed to merge with Firm E. Compute the post-merger value of the Hirschman-Herfindahl index. Compute the increase in the Hirschman-Herfindahl index caused by the merger.
c. Alternatively, suppose Firm A proposed to merge with Firm F. Compute the post-merger value of the Hirschman-Herfindahl index. Compute the increase in the Hirschman-Herfindahl index caused by the merger.
d. In Canada, the Competition Bureau has published its Merger Enforcement Guidelines. These do not rely upon the HHI. Instead, the Bureau provides "Market Share and Concentration Thresholds". Under what conditions will the Bureau not challenge a proposed merger?