Market Failures vs. Regulatory Shortcomings Assignment

Assignment Task 

Question 1

Read the article "Market failures vs. regulatory shortcomings" by Tyler Smith available at the American Economic Association website along with the relevant paper on, Imperfect Markets versus Imperfect Regulation in US Electricity Generation” by Steve Cicala published in American Economic Review. Write a quick summary of this article using your own words.

Question 2

Use the tools you acquired from the lectures to analyze the welfare effects of regulations. Specifically analyse the effects as follows.

(a) Use a supply and demand diagram to illustrate the perfectly competitive equilibrium in the market for electricity.

(b) On the same graph, show the effects ofa regulation restricting optimal electricity generation.What happens to the equilibrium price and quantity?

(c) In your diagram, show what happens to consumer surplus and producer surplus before and after the regulation.

(d) Show the area corresponding to the deadweight loss to society.

(e) Now, to alleviate the detrimental effects of regulations, what could be some appropriate policies that the Government can take to quickly restore an equilibrium similar to the market clearing one as 2(a)?

Question 3

 Many observers believe that the levels of greenhouse gas emissions from the electricity sector in the Australian economy are too high.

(a) If society wants to reduce overall emissions by a certain amount, why is it efficient to have different carbon abatement levels set for different firms?

(b) Economics usually prefer corrective taxes over regulations as a way to deal with greenhouse gas emissions. Can you explain why? (Hint: Can regulations target the firms that should undertake bigger reductions?)

(c) Suppose there is a sharp development in the technology for controlling greenhouse gas emissions. Using a diagram for the market for emissions, illustrate the effect of this
development on the demand for emission rights. What is the effect of a carbon tax on the price and quantity of emissions? Explain.

(d) The demand for emission rights depends on the time horizon. In the short term, it is likely inelastic because firms may not have many alternatives. Over time, however, demand becomes more elastic because more alternatives are developed. Illustrate the effects of an increase in carbon tax on emissions in the short run and in the long run. Explain.

Question 4

A carbon tax makes individuals and firms pay for the full social cost of carbon pollution. In light of your analysis above, do you think the carbon tax is a good policy to reduce greenhouse gas emissions in Australia? Why or why not? To answer this question, you may go beyond microeconomics and think about issues such as economic development and environmental protection. Please do a literature review and provide case studies & diagrams if necessary to provide your views on this topic.

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