TOPIC: Scarcity Rents

Generator 1 has 14D IMW capacity and its marginal cost is $SetWh. Generator 2 has 22D MW capacity and its marginal cost is $13iMWh. The inverse demand curve is: P = 455 UJQ- a) Draw the supply curve and the inverse demand curve. h) At what price does supply = demand? c) Identify on the graph the Consumer Surplus (CS): the Producer Surplus (PS), and the Scarcity Rent (SR) {based on the second denition given in class on scarcity rent see Lecture 2 Page 58}. What is the total scarcity rent? d) Some people argue that we should not allow for scarcity rents (a marlret clearing price that is higher than the largest supplier hid): that instead the price should never exceed the largest supplier hid. What do you think, should we allow scarcity rents? Explain