This question is inspired on the recent evolution of electricity markets in Switzerland and the EU. Suppose a market consists of three producers: i. Firm 1 (photovoltaics) has a marginal cost of production od CHF 1 and can produce up to 100 MW/h; Firm 2 (hydroelectric) has a marginal cost od production of CHF 5 and can produce up to 200 MW/H; ii.
This question is inspired on the recent evolution of electricity markets in Switzerland and the EU. Suppose a market consists of three producers: i. Firm 1 (photovoltaics) has a marginal cost of production od CHF 1 and can produce up to 100 MW/h; Firm 2 (hydroelectric) has a marginal cost od production of CHF 5 and can produce up to 200 MW/H; ii.
Chapter1: Making Economics Decisions
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Transcribed Image Text:Question 8
This question is inspired on the recent evolution of electricity markets in Switzerland and the EU.
Suppose a market consists of three producers:
Firm 1 (photovoltaics) has a marginal cost of production od CHF 1 and can produce up to 100 MW/h;
Firm 2 (hydroelectric) has a marginal cost od production of CHF 5 and can produce up to 200 MW/H;
Firm 3 (gas) has a marginal cost od production of CHF 20 and can produce up to 200 MW/h.
For simplicity, assume that there are no fixed costs of production.
Consumers are willing to pay a constant amount of 25 CHF for each additional MW/h up to 500 MW/h.
a) Draw a graph of supply and demand for this market.
b) Calculate the price in the market and the profits of each company.
i.
ii.
iii.
Suppose a regulator / government has two policy instruments at hand: setting the final consumer price and / or taxing
(partly) profits:
c) What price should the regulator set in this situation? Briefly justify your answer.
d) Should the government tax profits? If yes, explain why, and which firm should be taxes. If not, explain why not.
Expert Solution
Step 1: Define demand
Demand is the desire backed by a willingness to pay and the ability to pay by an individual. The summation of all individual demand curves is known as market demand. As price increases market demand will decrease and vice versa.
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