Problem
Your analysis considered a price ceiling at a price lower than the final market equilibrium price (P2) determined. For this question, assume that government policymakers in some U.S. states and several European countries, aware of the higher prices as shown, have agreed to subsidize consumers to protect them from the rapid growth in energy costs.
Energy markets, such as the market for natural gas and electricity, have been known to be characterized by inelastic demand. However, recent research discussed in the August 25, 2022 issue of The Economist, indicates that while the responsiveness of quantity demanded in response to price changes indeed is "inelastic" (i.e., the absolute value of price elasticity of demand is still less than 1), the percentage change in quantity demanded in response to a change in price is much larger than earlier research indicated.
1) What does "inelastic demand" formally mean? In addressing this part of the question, make sure to explain the concept of the price elasticity of demand using a simple formula and by providing a short narrative.
2) Policymakers are encouraging people to conserve energy in response to the growing energy crisis. Discuss the positives (pros) and negatives (cons) of providing subsidies to consumers in this situation by contrasting subsidies to other potential approaches (such as price ceilings and energy blackouts).