Lynne Kiesling
Energy Economics 101
Spring 2006
Professor Kiesling
Homework Assignment to Congress
Suppose producers in an economy produce a good, G. Suppose further that the consumption of G creates a negative effect, E, that is borne by more people than just the person consuming G.
Now suppose that to reduce E, the government passes a law stipulating that the inputs into G must now include either A or B in certain concentrations. But A itself creates a negative effect, so suppose that the government passes a new law saying that producers must use B and cannot use A; furthermore, those who used A in the past must bear the legal liability for any negative effects of A.
All other things equal, explain what will happen in the short run to the following variables in this situation:
- The quantity supplied of B
- The price of B
- The price of G
- The quantity supplied of A
Answers are due in the comment box, at your convenience.
The quantity of B supplied goes way up, so the price of B goes way up (doubling in less than a year sounds about right...). Since B is now a mandated input of G, the price of G will increase. The quantity of A supplied will decrease, and the producers of A will begin having nightmares involving asbestos litigation and will be scared s@!*less.