Problem Set 2

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Since the regulators had implemented an emissions limitation of 2,000 tons per year, this is an overproduction (as the efficient level considering the true MEB is 1,739.13 tons/year). The associated deadweight loss is area B. DWL = .5( 25 10 −
a) What is the implicit price of home lighting per hour? How many hours is the typical household lit up? ($0.075 / kWh) x (0.8 kWh / 1 hour) = $0.06 / hour Q = 6,000 – 20,000P Q = 6,000 – 20,000(0.06) Q = 4,800 hours b) Suppose light bulb efficiency increases by 25% so that a home uses just 0.6 kWh for every hour the home is lit. What is the new implicit price of electricity per hour of home lighting? How many hours How many hours is the typical household lit up with this increased efficiency? ($0.075 / kWh) x (0.6 kWh / 1 hour) = $0.045 / hour Q = 6,000 – 20,000(0.045) Q = 5,100 hours Note that with increased efficiency, consumers will actually use more electricity! If the government wants to significantly reduce the amount of electricity consumed, they would need to combine increased efficiency with another mechanism… c) Now suppose that even as efficiency increases the government sets a goal of decreasing electricity consumption by 25%. What additional tax would have to be added to the price of gasoline to reach this goal? Let’s look at the electricity consumed in both scenarios: (a) (4,800 hours) x (0.8 kWh / hour) = 3,840 kWh’s (b) (5,100 hours) x (0.6 kWh/ hour) = 3,060 kWh’s Notice that even though consumers are using lights more as efficiency increases, there is a slight decrease in electricity consumption. However, this decreased consumption falls short of the government’s 25% reduction goal (relative to the electricity consumed in part a). 25% Reduction: (3,840 kWh’s) x (1 – 0.25) = 2,880 kWh’s GOAL 19
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Page 15 and 16: Problem 8 You’re a policy analyst
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Problem Set 2

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