a. Draw conceptual diagrams for two markets, residential fuel oil and residential natural gas, assuming that policy impa

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A Draw Conceptual Diagrams For Two Markets Residential Fuel Oil And Residential Natural Gas Assuming That Policy Impa 1 (112.85 KiB) Viewed 25 times

a. Draw conceptual diagrams for two markets, residential fuel oil and residential natural gas, assuming that policy impacts in the fuel oil market do not affect the price in the residential gas market. Then assess the welfare impacts 4 i. (5 points) In the first diagram, draw a price and quantity axis for the residential fuel oil market. The horizontal axis should be the quantity of fuel oil consumed, in quadrillion Btus per year (qBtu/yr). The vertical axis should be the price for fuel oil, in dollars per million Btus (S/MMBtu). A Btu stands for "British thermal unit" and is a unit of heat, defined as the amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit. Energy prices and quantity in the U.S. are often quoted in Btus. In this market diagram, draw a downward sloping, linear demand curve, Dx, for fuel oil. For simplicity, assume that the supply curve in this market is perfectly elastic. Add two horizontal supply curves. The lower supply curve, Sxo, represents the baseline supply before a regulatory action and the upper supply curve, Sxi, represents the post-policy supply after a regulatory action that raises the cost of supplying fuel oil. Label the equilibrium price and quantity on the appropriate axis both before the policy, (pxo, xo), and after the policy, (Px1, x₁). ii. Label the areas in both markets with letters (A, B, C, etc.) to indicate the areas of consumer and producer surplus in each market, both before and after the policy action in the fuel oil market.< iii. (5 points) Complete the Benefit-Cost tableau below for both markets to illustrate the change in welfare from this policy action. When assessing the impacts on consumer surplus in the market for natural gas, pay attention to the section in Chapter 4 of your textbook on valuing benefits in efficient markets and, particularly, the diagram on measuring benefits in an efficient market with no price effects. < Change in welfare from a policy in the fuel oil market that does not affect the price in the residential natural gas market Primary Market: Fuel Oile Benefits Costs Net Benefits e e 4 Consumers Producers Government Net Social Effect P W Secondary Market: Natural Gas Benefits Costs Net Benefits 4 e P P P 2 Comprehensive Net Benefits e P illa 12 P 2