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Regulatory effect on equilibrium

Peak Period Computations

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 Peak Period Computations:

a) Now compute the consumer surplus effect of going from the regulated price to the peak price during the peak period.

b) compute the producer surplus effect of going from the regulated price to the peak price during the peak period.

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

d) Compute the change in consumption value for consumers of going from the regulated price to the peak price during the peak period.

e) Compute the change in economic cost for producers of going from the regulated price to the peak price during the peak period.

f) Based on your answer in (d) and (e) compute the net benefit of going from the regulated price to the peak price during the peak period.

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

Solution Summary

Regulatory effect on equilibrium is examined.

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