Politicians concerned with climate change are proposing that a tax on electricity should be implemented with the hope that it will incentivize energy abatement. But they are also want to structure a policy such that it is the producers of electricity that pay the tax, not the consumers. Therefore, they propose a tax of $1/MW h to be paid by the generator of electricity. You have been hired to assess the economic implications of the proposed tax.
After running your econometric modeling, you conclude that the market for electricity is characterized by the following equations:
Demand Curve: P = 40 − 3Qd
Supply Curve: P = Qs
Where P is dollars per MWh and Q is Millions of MWhs.
Part 1: What is the equilibrium price (P ∗ ) and quantity (Q∗ ) with no tax assessed?
Part 2: What will be the equilibrium quantity after the tax is assessed (Q∗ T )? What is the price that the consumer will pay after the tax is assessed (P consumer T )? What is the price that the producer will receive (post tax) after the tax is assessed (P producer T ) ?
Part 3: Was the politician successful in reducing electricity usage? If so, by how much?
Part 4: How much tax revenues are raised by the new tax?
Part 5: What is the tax incidence to the consumers?
Part 6: What is the tax incidence to the producers?
Part 7: Was the policy maker successful in assessing the tax on producers, not consumers?