Question

Please use Isoquant-isocost graph to explain. Thank You!

•Suppose a power plant can use a mixture of coal and renewable resources to generate Q1 level of electricity. And the price of coal is Pc and price of renewable resources is Pr. Notice that the use of coal or renewable resources will subject to law of diminishing marginal product. Now, evaluate the following policies on the production cost of electricity.

a)Government imposes the technology based effluent standards (TBES)* on air pollution generated by the power company. It limits the use of coal of the power company.

b)A tax on the use of coal.

c)A subsidy on the use of renewable resources.

Answer 1

a.)

A limit on the use of coal, keeping the firm's cost and the price of coal and renewable resouces constant, will be a movement along the same isocost curve, on a different isoquant. This means that the total cost of production will still remain the same, the amount of money they save for not being able to use coal beyond the limit will be used in purchasing more renewable resource, and the quantity of electricity generated will change as the new point of tangency will be with a different isoquant.

If the coal is measured a long the y-axis and renewable resource is measured along the x-axis, then this movement will be downwards towards the x-axis where the is more of renewable resource and less of coal. The change is from E1 to E2, from IQ1 to IQ2.

COAL Yz EL 121 E2 yo 192 CS Scanned with Camste 6-2 RENEWABLE RESOURCE

b.)

If the government imposes a tax on coal, then the price of coal increases, This will cause a rotation in the isocost line, inwards on the y-axis. The isocost will rotate from AB to CB in the diagram below. This will also cause the eqilibruim tangency point with the isoquant to change, as shown in the diagram from E1 to E2. Since coal has become more expensive, the new equilibrium will have less of coal and more of renewable resource.

COAL EL * IQ1 + 42/ ID 2 442 CS Scanned with CamScanner RENEWABLE RESOURCE

c.)

If the government gives a subsidy on renewable resource, then the price of renewable resource decreases, This will cause a rotation in the isocost line, outwards on the x-axis. The isocost will rotate from AB to CB in the diagram below. This will also cause the eqilibruim tangency point with the isoquant to change, as shown in the diagram from E1 to E2. Since renewable resrouce has become less expensive, the new equilibrium will have less of coal and more of renewable resource.

Y -> 161 Y2 I2 CS Scannedpeith CamScannele RENEWABLE RESOURCE