Consider a perfectly competitive market for oil, where oil is beingextracted and sold to consumers. There are two time periods, t = 1, 2.The demand and supply equations:Supply: marginal extraction cost = $10/barrel in each period.Demand: marginal private benefit = $40-qt, where qt is thenumber of barrels produced in period t.Reserves are 20 barrels, meaning that no more than 20 barrels canextracted overall across the two periods. The discount rate is 50%.Suppose the marginal external damages of producing oil are $10 perbarrel. Suppose that before production occurs in period 1, thegovernment announces it will tax production at $10 per barrel in period2, but there will not be any tax in period 1.1.1 How does the production tax affect prices and quantities inperiods 1 and 2?1.2 Draw a diagram similar to the one in 1.2 showing marginal netbenefits and quantities, where marginal net benefits are net ofthe production tax.Suppose that instead of announcing the tax prior to the beginning ofperiod 1, the government waits until after period 1 to announce that inperiod 2, production will be taxes at $10 per barrel.1.3 How much oil is produced in period 2, and what is the price?

Marginal extraction cost (MEC) is the cost of extracting one additional barrel of oil from the…

1.1 How does the production tax affect prices and quantities in periods 1 and 2? 1.2 Draw a diagram similar to the one in 1.2 showing marginal net benefits and quantities, where marginal net benefits are net of the production tax. Suppose that instead of announcing the tax prior to the beginning of period 1, the government waits until after period 1 to announce that in period 2, production will be taxes at $10 per barrel. 1.3 How much oil is produced in period 2, and what is the price?

1.1 How does the production tax affect prices and quantities in periods 1 and 2? 1.2 Draw a diagram similar to the one in 1.2 showing marginal net benefits and quantities, where marginal net benefits are net of the production tax. Suppose that instead of announcing the tax prior to the beginning of period 1, the government waits until after period 1 to announce that in period 2, production will be taxes at $10 per barrel. 1.3 How much oil is produced in period 2, and what is the price?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider a perfectly competitive market for oil, where oil is being
extracted and sold to consumers. There are two time periods, t = 1, 2.
The demand and supply equations:
Supply: marginal extraction cost = $10/barrel in each period.
Demand: marginal private benefit = $40-qt, where qt is the
number of barrels produced in period t.
Reserves are 20 barrels, meaning that no more than 20 barrels can
extracted overall across the two periods. The discount rate is 50%.
Suppose the marginal external damages of producing oil are $10 per
barrel. Suppose that before production occurs in period 1, the
government announces it will tax production at $10 per barrel in period
2, but there will not be any tax in period 1.
1.1 How does the production tax affect prices and quantities in
periods 1 and 2?
1.2 Draw a diagram similar to the one in 1.2 showing marginal net
benefits and quantities, where marginal net benefits are net of
the production tax.
Suppose that instead of announcing the tax prior to the beginning of
period 1, the government waits until after period 1 to announce that in
period 2, production will be taxes at $10 per barrel.
1.3 How much oil is produced in period 2, and what is the price?

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