Question

Consider the markets for fossil fuels (oil, coal, natural gas) and alternative energy sources (solar, wind, geothermal power etc). Due to the current climate change, let's say we desire to have people use less of the fossil fuels (which produce greenhouse gasses that cause global warming) and more of the alternative energy sources.

Using the concepts of Supply and Demand, discuss how the government can use policies to shift these curves, and what the results will be on the quantities and prices of the fossil fuels and the alternative fuels. Describe specific policies, the resulting shifts of Supply and/or Demand, resulting changes in quantities and prices, of both fossil fuels and alternative energy sources. Of the policies you described, which are your favorites, and why?

Please include Supply and Demand graphs.

Please include at least one outside reference.

Answer 1

The government may impose tax on the use of these fossil fuels. As a result of taxation, the demand for these fossil fuels reduces, because due to taxation, these fossil fuels are now expensive. Thus the demand curve of these fossil fuels shifts leftward. Thus the price of fossil fuels also decreases.

In the following figure, the demand and supply of fossil fuels has been shown. The SS curve shows the Supply Curve, the D₀D₀ curve shows the initial demand curve, which in6tersects the supply curve at E₀. The corresponding quantity demanded is Q₀ at price P₀. Now due to the policy of the government, the demand for fossil fuels reduces, and then the demand curve shifts leftwards to D₁D₁. Hence the new equilibrium is achieved at point E₁ corresponding to a lower quantity demanded Q₁ and at a lower price P₁.

Now it must be noted that the demand for alternative energy sources will increase. This may lead to a increase in the price of alternative energy sources in the long run.