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Regulatory effect on equilibrium

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Consider an electricity market with a daytime (peak-period) inverse demand of P=160-Q, and a nighttime (off-peak) inverse demand P=80-Q, where P is the price of electricity and Q is units of electricity. The marginal cost of supplying electricity is: MC=Q. Right now the utilities face a regulated pricing regime - they are required to charge a price of 60 cents per unit of electricity, and provision whatever level of electricity consumers are willing to buy at this regulated price. Based on this information, answer the following questions. I think diagrams will be helpful.

All Off-Peak Computations:

a) Compute the consumer surplus change of going from the regulated price to the off-peak price during the off-peak period.

b) Compute the producer surplus change of going from the regulated price to the off peak price during the off-peak period.

c) Based on (a) and (b), compute the net efficiency effect of going from the regulated price to the off-peak price during the off-peak period.

d) Compute the additional consumption value for consumers of going from the regulated price to the off-peak price during the off-peak period.

e) compute the economic cost change to producers of going from the regulated price to the off peak price during the off-peak period.

f) Based on (d) and (e), compute the net benefit (economic value less cost) of going from the regulated price to the off peak price during the off-peak period

g) How does your answer in (f) compare to your answer in (c)?

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Solution Summary

All Off-Peak Period Computations are depicted.

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