Transcript day18
Economics of Energy Policy Monday, March 20 Sources of inefficiency Externalities (market failure) Government failure (perverse incentives) Externalities in energy production and consumption Coal mining Electricity generation Oil extraction and refining Gasoline use in automobiles External costs of extracting coal S=MPC + MSC $ S=MPC only P* pm D q* qm Quantity of coal mined External costs of electricity generation from coal S=MPC + MSC $ S=MPC only P* pm D q* qm Quantity of electricity from coalpowered generation External costs of using oil and its derivatives – e.g. refining oil into gasoline Total MC S = MPC $ Pe Pm D Qe Qm Quantity of gasoline External costs of gasoline use in automobiles $ Total MC pm D qe qm MC Quantity of gasoline used by automobiles Energy policy objectives Reduce import dependency ratio so that U.S. is less vulnerable to unstable world markets Manage domestic prices so that high energy prices do not dampen economic activity Shift energy use from depletable to renewable sources Reduce energy demand overall Supply policy Open new reserves in the U.S. Alaskan Wildlife Reserve At SD: ratio = (Qt – Qd)/Qt At SD2: ratio = (Qt – Qd2)/Qt Domestic Supply SD $ SD2 International Supply Pw SI Domestic Demand Qd Qd2 Qt Quantity of petroleum Price policy Strategic oil reserves Short-term increase in domestic supply Price controls Temporary restrictions on prices paid by energy users (this was done in the 1970s) Price controls (consumers’ price was set) in the 1970s resulted in shortages of gasoline S $ Pm Price control D Qs Qm Qd Quantity of gasoline Alternative source development Hydrogen cells Much of the R&D with federal funding Wind farms Clean but loud Solar power Alternative approaches to encouraging conservation of gasoline: Make cars more fuel-efficient Impact on gasoline use depends upon elasticity of demand for driving Driving is less costly if cars use less gas to travel any given distance Make gasoline more expensive The cost of driving any distance is higher This may increase the demand for fuelefficiency, but not for miles driven Changes in fuel efficiency standards so cars use less gasoline: Impact on use of gasoline in cars depends upon the elasticity of demand for driving. $ MC pm MC ‘ D qm Miles of driving D’ How do we choose from among alternative energy sources? $ MCcoal MCwind D Qc Qw Energy BTUs