During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the
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Question:
During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural gas that would flow through the pipeline. The thinking behind the bill was that if private firms had a guaranteed price for their natural gas, they would be more willing to drill for gas and to pay to build the pipeline.
- Using the demand and supply framework, predict the effects of this price floor on the price, quantity demanded, and quantity supplied.
- With the enactment of this price floor for natural gas, what are some of the likely unintended consequences in the market?
- Suggest some policies other than the price floor that the government can pursue if it wishes to encourage drilling for natural gas and for a new pipeline in Alaska.
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