The state to address high price of electricity want a cap on the price at $16,00
ID: 1122829 • Letter: T
Question
The state to address high price of electricity want a cap on the price at $16,000 per mil kW. Due to the cap, it will allow other companies to enter the market at the capped price. (Because the price is capped and there is excess of demand, in California P = MR]. One person argues that if the price is capped at $16,000, other companies will not sell in state since they can get higher prices out of state and would cause shortages, is this correct and would in state companies refuse to supply in state?
Explanation / Answer
If a state due to high price elasticity of demand for the electricity fixes the price of per mil KW at $16000 ,then no doubt it will attract other companies as P=MR but it will further create shortage of electricity because electricity suppliers get higher price as it is more profitable for the sellers to sale electricity outside of the state.It is true to some extent but the seller also need to see the transportation cost of providing electricity to other state.And if the transportation cost is high in selling electricity to other state they will not do so.
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