Britains new Prime Minister, Liz Truss, recently announced a price cap on energy prices for two years in anticipation of the soaring energy prices brought about by the current conflict in Ukraine. Specifically, there is a cap on how much households have to pay for heating oil.

(a) Draw a supply and demand diagram of the British market for heating oil with the implementation of the price cap, assuming the price cap works as a standard price ceiling. And explain what happens to the market (supply, demand, equilibrium quantity and price) after the price cap is imposed. Label all areas to be used with the welfare table in part (b).

(b) Explain in a welfare table and in words who gains and who loses, including changes in the composition of the market.

(c) Now, consider the price cap policy with different time horizons. Draw two supply and demand graphs of the price cap; one in the short run and one in the long run.

(d) Is the impact of the policy greater in the short run or in the long run? Explain.