While price is a very effective way of allocating goods, governments sometimes like to keep the price of a good low for political reasons. Suppose, using Figure 5.1, that the utility decided to provide 1 KWH of electricity, but only charge $83 per MWH.
(a) What is total willingness to pay?
(b) What is consumer surplus in this case? Remember that consumer surplus is the area under the demand curve, but above the price paid, between the vertical axis and the quantity consumed.
(c) If the utility sells the electricity at the market-clearing price of $294/MWH, what is the consumer surplus?
(d) What happens to the difference in consumer surplus between these cases? Does it vanish?