Gas Prices: An Expensive “I Told You So”

Lynne Kiesling

Energy Economics 101
Spring 2006
Professor Kiesling

Homework Assignment to Congress

Suppose producers in an economy produce a good, G. Suppose further that the consumption of G creates a negative effect, E, that is borne by more people than just the person consuming G.

Now suppose that to reduce E, the government passes a law stipulating that the inputs into G must now include either A or B in certain concentrations. But A itself creates a negative effect, so suppose that the government passes a new law saying that producers must use B and cannot use A; furthermore, those who used A in the past must bear the legal liability for any negative effects of A.

All other things equal, explain what will happen in the short run to the following variables in this situation:

• The quantity supplied of B
• The price of B
• The price of G
• The quantity supplied of A

Answers are due in the comment box, at your convenience.