Question

1. The electricity technology (on the roof of all houses) lowers the cost of electricity for each house. Evaluate the statement: each household benefits equally.

2. Justify why the rational expectation of increased future demand in electricity does not cause the above supply and demand curves to change

Answer 1

1. The installation of electricity technology on the roof of all houses can possibly impact the consumers both economically and from the perspective of broader socio-economic and environmental welfare. First, the installation would provide higher efficiency through optimal utilization or usage of electricity at the household level and lower the price or cost of electricity paid by each household which would lead to a higher consumer surplus in the market, holding all the other relevant market factors as constant. This overall positive impact on the consumer surplus of the new electricity technology would generate direct economic benefit for the consumers as now, they can consume the same or higher units or quantity of electricity at the household level by paying lower cost or price per unit of electricity consumption. Therefore, a general(not discriminatory) reduction in the cost or price of electricity would equally benefit all the households through the installation of the new cost-reducing and energy-efficient technology which would raise overall consumer surplus and welfare in the electricity market. However, due to reduced cost or price, if the new technology leads to higher electricity consumption at the general household level, then it can potentially increase the level of negative environmental and communitarian externality due to the generation of excessive generation of heat energy. It will not directly affect the welfare or well-being of the people and communities in general but can further contribute to the greenhouse effect in the environment which can affect the overall environmental or ecological welfare at various capacities and magnitude. Therefore, the negative impact or externality caused by higher electricity usage due to relatively lower cost or price could have serious and concerning welfare repercussions in the future, especially considering environmental welfare and communitarian well-being to some extent.  

2. The rational expectations of higher consumer demand for electricity in the future would basically prevent the electricity suppliers to increase or modify their present supply level in the market so that they can adjust the overall supply level in the future in accordance with any expected positive or optimistic fluctuations in the consumer demand. Therefore, even if there is/are any current fluctuation/s in the market demand, the market supply level would mainly adjust according to long-run expectations which would offset any temporary impact of short-run market changes or effects. Therefore, the stickiness of the electricity supply in the short-run and the long-run adjustments of the same would also eventually lead to the consequent adjustments of the electricity demand in the long-run thereby, countervailing any short-run or relatively temporary market fluctuations or changes and restoring the original or erstwhile market outcome.