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Because supply is less elastic than demand in this

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Unformatted text preview: hy? Provide a short explanation (one or two sentences, maximum). ANS: es = dQs/dp * p/q = 5*40/200 = 1 ; ed = dQd/dp * p/q = 20*40/200 = 4. (Note: in reality, demand for electricity is much less elastic than its supply). Because supply is less elastic than demand in this problem, consumers have more flexibility to respond to changes in prices than producers. Producers will therefore bear a larger share of the costs of the policy. c) Suppose marginal external damages from emissions due to the production of electricity are constant, with MED = 5. What is the optimal permit price for these emissions? ANS: The optimal price of a permit is equal to the marginal cost of abatement at the permit market equilibrium, which is equal to marginal external damages evaluated at the optimal quantity if permits have been set to the socially optimal level. Since MED is constant here, the permit price is 5. If you answered “25” because of the error in the original HW, you should receive full credit. d) Add this permit price to the private marginal cost curve to get a new supply curve under this policy. Label this curve “PMC+permit costs”. Add this curve to your graph. ANS: See graph above. e) Find the socially optimal price and quantity of electricity. Label this poi...
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