Question

Analyse the Case
Shanghai is China’s financial and business hub. In late July 2004, with daytime temperatures reaching 37 degrees Celsius, the city’s electricity consumption surged to a weekly record of 14.35 million kilowatt hours. The city authorities resorted to asking 2,100 businesses to operate at night, and a further 3,000 others to adjust operating hours.
The Chinese government has certainly been working tirelessly to resolve the power crisis. Thermal coal is the principal fuel used to generate electric power in China. In July, Premier Wen Jiabao exhorted, “Railway departments should do their utmost for the transport of coal for electricity generation”. The Ministry of Railways increased train speed and freight loads, and allocated 90% of freight capacity to transport key materials. In the first half of 2004, Chinese railways shipped 480 million tons of coal, up 12.2% over the same period last year.
The Ministry of Communications has also pitched in. It diverted ships from overseas routes to domestic coal transport and approved emergency coal transportation on various roads and waterways. China is the world’s second-biggest coal exporter. In 2003, China exported 93 million tons of coal, including 80.8 million tons of thermal coal. To assure supplies to the electric power industry, the Chinese government has limited coal exports to 80 million tons in 2004. China Coal Import & Export Vice President Zhou Dongzhou predicted that exports of thermal coal would fall to 70 million tons.
In the late 1990s, the Chinese government dissolved the Ministry of Electric Power, and divided its functions between the State Electricity Regulatory Commission (SERC) and the State Power Corporation of China. The State Power Corporation owns five of the six transmission grids (Northwest, North, Northeast, Central, and East) and about half of the national generating capacity. Regulation is necessary to ensure that the State Power Corporation does not abuse its monopoly power.
The SERC regulates all aspects of the electricity industry, except pricing. With regard to electricity pricing, the SERC’s role is to advise the National Development Reform Commission (NDRC).
Some estimate that the nationwide power shortage will soon reach 30 million kilowatts, which is more than double Shanghai’s peak consumption.
With China headed for a power crisis, the government is under pressure to increase electricity prices. In June 2004, following persistent rises in the cost of fuel, the NDRC increased electricity prices by an average of 2.2 fen per kilowatthour in the East, North, Central, and South grids. But, apparently, this increase has not been sufficient. The threat of a power crisis continues.
Analyze the case and answer the following questions.
(a). Explain how the impact of a price increase on electricity consumption depends on the price elasticity of demand. (7.5 Marks)
(b). The price elasticity of the Indian demand for electricity has been estimated to be -0.65 among residential users and -0.45 among industrial users. If these elasticity’s apply to China as well, how will the impact of a price increase be spread between residential as compared with industrial users? (7.5 Marks)

Answer 1

a- Electricity is a public utility. the utility industry is a natural monopoly. The utility monopolies provide water, sewer services, electricity etc. The electricity supply is one such  natural monopoly industry. The country or state provides supply or in some cases outsources to some big private companies. The reason for natural monoploy is high start up cost and entry barriers. The government is the authority to set price according to  county regulations. The price elasticity in case of natural monoploy is very low so  if the government  increase the price for the electricity by some  percentage the effect on the demand will be less as cpmpared to the e percentage increase in prices.

B- price elasticity of demand is an economic measure to find the change in the quantity demanded with respect to change in price. the price elasticity varies between perfsectly elastic to non elastic. it depends on degrees of elasticity.the price elasticity of demand ranges from zero to infinity. It can be equal to zero, less than one, greater than one and equal to unity. ed infinity means a small change in demand will fall the demand to zero. while ed =1 means equal proportionate change in quantity demanded to price change. ed=0 means no change in demand to price change. here in this case both Industrial and residential demand elasticity is more than zero but leas than one so there will less proportionate change in demand to change in price. i.e the demand will fall but not equally. also fall is demand will be more for residential buyers as compared to industrial users.