# Economics homework help

Economics homework help. Problem Set Three
Submit your answers via D2L by noon Wednesday, April 1. You can submit a WORD file with
typed answers or a scanned file. You do not need to include any graphs with your answers.
1. (6 points) Consider a wholesale electricity market with the following two types of suppliers:
Type Marginal Operating Cost Capacity
Coal \$24/MWh 3000 MW
Natural Gas \$40/MWh 2000 MW
In order to answer the questions below, graph the hourly competitive supply curve for this market
and use this with demand information.
a. What is the competitive equilibrium price if demand is perfectly inelastic at 2400 MW? Does
either type of supplier earn profits in equilibrium?
b. What is the competitive equilibrium price if demand is perfectly inelastic at 4400 MW? Does
either type of supplier earn profits in equilibrium?
c. Suppose that suppliers with 1500 MW of solar generation with zero marginal cost enter the
market. How does this change your answers to parts (a) and (b)?
2. (10 points) Consider the following scenario about daily GhG (greenhouse gas) emissions. The
marginal cost of emissions (also called the social cost of carbon) is constant and equal to \$20/ton of
emissions. The marginal benefit curve for emissions is linear, starting at \$100/ton at zero emissions
and falling to \$0/ton at 1,000 tons per day.
Emissions in tons/day
\$
1000
100
20
SCC
MB
2
The graph above depicts the MB and SCC (MC) curves.
a) How large would you expect daily GhG emissions to be if there is no regulation of emissions?
b) Explain how to find the socially optimal levels of GhG emissions and of emissions abatement
on the graph. Provide a number for the socially optimal number of tons/day of emissions and for
emissions abatement.
c) Suppose that a tax of \$10 per ton of emissions is imposed. How much emissions abatement
would occur as a result of the tax? How would the level of emissions abatement compare with
the socially optimal level?
d) How much tax revenue would be raised by the \$10 per ton tax?
e) Extra Credit (4 points): Suppose the government institutes a cap and trade program for GhG
emissions, and further suppose that the cap for emissions is set at the socially optimal level.
What trading price would you expect for emissions permits under this cap and trade scheme?
Explain. Does it matter whether the government auctions off all permits (requiring any firm that
would emit greenhouse gases to purchase a permit at its auction) or the government gives
permits away to firms (e.g., in proportion to prior emissions) and then allows firms to buy and
sell emissions permits in a trading market? If it matters, explain how. If it doesn’t matter,
explain why it doesn’t.
HINT for parts (b) through (e): The marginal benefit curve is linear and so has constant slope.
You can use the slope, coupled with knowledge of the vertical intercept, to find the quantity of
emissions for any \$-value of marginal benefit

Economics homework help

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