Homework Chapter 4 passed out Sept 15, 2020, due Sept 22, 2020 AG E/ECON 337V Policy Analysis for Climate Mitigation Background: This homework asks you to calculate an equilibrium price and quantity of coal fired power and to conduct a policy analysis for addressing climate mitigation. Demand: Suppose US demand for coal fired power is given by the attached table (red demand schedule in column 2 and also the graph below. It shows that the demand for power goes up with a reduced price. For those who are curious, its demand equation is P = 24-7.0 * Q, where P is measured in cents per kwh of power and Q is measured in trillions of kwh per year. The equation says that the maximum price (P) buyers will pay is 24 cents per kwh. That price falls by 7.0 cents per kwh as quantity of power offered for sale increases by each 1 unit (trillion kwh/year). Supply (Marginal Private Cost): Suppose the US supply of coal fired power is also given by the attached table (black supply schedule) in column 3 and also the colored graph below. The supply for power increases with an increased price. Its equation is: P = 4.0 + 3.0 * Q. This says that producers will supply nothing unless the price reaches 4 cents/kwh, an amount needed to cover their costs. After the first unit of output (trillion kwh per year) producers require an increase of 3.0 cents per kwh to affordably supply each extra unit. Marginal Social Cost: Each extra unit of power (Q) leads to a marginal external cost of 6 cents per kwh from costs of global warming shouldered by future generations. If we add this marginal external cost to the market supply above, the equation for the total social cost supply curve is given by the fourth column (green dashed supply schedule). Its equation, if you're interested, is P = 10.0 + 3.0 * Q. Policy: In 2017, the USA dropped out of the global climate accord signed in Paris in December 2015. In December 2015, at the Paris climate conference (COP21), the US and 194 other countries signed on to the first-ever universal, legally binding global climate deal. It's described at http://ec.europa.eu/clima/policies/internationalegotiations/paris/index_en.htm So, as of 2020, the remaining signatories will need to take their own steps without US help to control climate change. Questions: (8 pts) Compute the unregulated equilibrium output and price as well as the socially efficient level of each. By how much is the market equilibrium price below the socially efficient price? Show work. (8 pts) Compute the money value of the deadweight loss that occurs if society permits power producers continue to generate negative climate externalities without regulation. (8 pts) Suppose, following the intent of the 2015 Paris Climate Accords, the US Congress imposes a climate tax per unit output on coal generated power. Its intent is to equalize the market-produced level of output and the socially efficient level. As economic adviser to the Congress, what will your recommended tax be (tax per kwh) when you prepare your testimony? Explain to your critic why you recommend this level. (XC 5 pts) What is the economic gain (deadweight loss avoided) of this tax? Defend your
