Consider an economy in which the demand for electricity is qd = 100p where qd is the quantity demanded and p is the price measured in dollars. There are two sources of electricity supply: nuclear power and renewable power (wind and solar). The supply curves of these two sectors are qn = 2p qr = p
where qn and qr are the quantities supplied by the nuclear and renewable sectors.
(a) Suppose that there is no government intervention. Find the equilibrium price of electricity. Find the quantity sold by the nuclear sector and the quantity sold by the renewable sector. Find consumer surplus, the producer surplus of the nuclear sector, the producer surplus of the renewable sector, and total surplus.
(b) Now imagine that the government, wishing to encourage renewable power, introduces a new policy. It will pay the renewable sector a price of $40 for electricity. It will purchase from the renewable sector as much electricity as the sector is willing to sell at this price, and then resell it at the market price. Find the new market (or equilibrium) price. Find the quantity sold by the nuclear sector and the quantity sold by the renewable sector. Calculate the cost of the program to the government. Find consumer surplus, the producer surplus of the nuclear sector, the producer surplus of the renewable sector, and total surplus.