Arizona Econ 373 – Environmental Economics

Econ 373 – Environmental EconomicsUniversity of ArizonaFall 2016Problem Set 9Due November 22, 20161. Consider the market for electricity. Consumers have higher demand during day time hours than they do during nighttimehours. The daytime and nighttime demand curves are given belowQDday = 100 2P QDnight = 60 2P Suppose consumers must pay a fixed rate of $14 per unit consumed regardless of the time of day.(a) Draw the fixed rate and the nighttime and daytime demand curves. Determine how much electricity will be consumedduring the day and how much will be consumed at night.(b) Suppose the supply curve for electricity is given by: QS = 10 + 3P . If consumers were given smart meters and couldreact to changing real-time prices. What would the equilibrium quantity and price be in the day time? What wouldthe equilibrium quantity and price be in the nighttime?(c) Draw the supply curve into your graph for part (a) and determine the total dead-weight loss from fixed rate pricing.(Hint this will be the sum of the area of two triangles)2. An electric power system has the following mix of generating capacity installed on its network: TypeNuclearCoalGas CC (efficient)Gas CT (inefficient) Table 1: Generation PortfolioMarginal Operating Cost Capacity$10/Mwh1000MW$20/Mwh2000MW$30/Mwh1500MW$50/Mwh500MW Marginal Damages$0$20$10$15 (a) Assume that nighttime demand is 1700 Mw and is completely price inelastic in the very short run. What would bethe marginal cost of production? Which generators would be operating and how much would each one produce?(b) Assume that daytime demand is 4000 Mw and is completely price inelastic in the very short run. What would bethe marginal cost of production? Which generators would be operating and how much would each one produce?(c) Assuming that nighttime demand is 1700 MWH and is completely price inelastic in the very short run. What isthe marginal generator at night? Wind energy has zero marginal cost and zero marginal damages. What would bethe marginal private benefit of adding one MWH of production of wind energy? What would the marginal externalbenefit be? What would be the marginal social benefit?3. For the extra credit quiz, also review lecture notes and the PowerPoint slides on D2L. 1