4. This question is based on the discussion on pp 6 to 8 in the Sweeney reading,

Question

4. This question is based on the discussion on pp 6 to 8 in the Sweeney reading, where he discusses the need for retail prices to reflect changes in wholesale prices. It is well known that the short run price elasticity of demand for electricity is extremely low, perhaps around -0.1. Given such a low price elasticity of demand, evaluate Sweeney's argument that price spikes could have been avoided if California had allowed retail rates to rise at the same time that wholesale prices were rising. Do you agree? Why or why not? Please base your answer on economic principles and you may wish to reference Figures 2 through 4 in the Sweeney reading.

Explanation / Answer

If the whole sale prices rises then definitely retail prices increases because the retailer sold from the wholesale. The source for retailer increases then the retail price also increase.

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