Price Controls and Natural Gas Shortages a 1975 Price controls created a shortage of natural gas a What was the deadweight loss? Chapter Slide 11
Chapter 9 Slide 11 Price Controls and Natural Gas Shortages ◼ 1975 Price controls created a shortage of natural gas. ◼ What was the deadweight loss?
Price Controls and Natural Gas Shortages Data for 1975 a Supply: Q=14+ 2PG + 0.25Po o Quantity supplied in trillion cubic feet (Tcf) Demand:Q=-5P+3.75尸 ● Quantity demanded(Tcf a PG price of natural gas in $/mcf and o- price of oil in $/b Chapter Slide 12
Chapter 9 Slide 12 ◼ Supply: QS = 14 + 2PG + 0.25PO ⚫ Quantity supplied in trillion cubic feet (Tcf) ◼ Demand: QD = -5PG + 3.75PO ⚫ Quantity demanded (Tcf) ◼ PG = price of natural gas in $/mcf and PO = price of oil in $/b. Price Controls and Natural Gas Shortages Data for 1975
Price Controls and Natural Gas Shortages Data for 1975 Po=s8/b Equilibrium PG=$2/mcf and Q=20 Tcf a Price ceiling set at $1 a This information can be seen graphically Chapter Slide 13
Chapter 9 Slide 13 ◼ PO = $8/b ◼ Equilibrium PG = $2/mcf and Q = 20 Tcf ◼ Price ceiling set at $1 ◼ This information can be seen graphically: Price Controls and Natural Gas Shortages Data for 1975
Price Controls and Natural Gas Shortages Price (S/mcf) The gain to consumers is 240 rectangle A minus triangle B. and the loss te producers is rectangle a plus triangle C. 2.00 C Pmax)1.00 05101518202530 uantity(e Chapter 9 Slide 14
Chapter 9 Slide 14 B A 2.40 C The gain to consumers is rectangle A minus triangle B, and the loss to producers is rectangle A plus triangle C. D S 2.00 Quantity (Tcf) 0 Price ($/mcf) 5 10 15 18 20 25 30 (Pmax)1.00 Price Controls and Natural Gas Shortages
Price Controls and Natural Gas Shortages a Measuring the Impact of Price Controls 1 Tcf 1 billion mcf ●fQ=18, then f=$2.40 ◆[18=-5尸+375(8) oA=(18 billion mcf)x($1/mct)=$18 billion .B=(1/2)x(2 b. mct) x($0. 40/mcf)=$0. 4 billion ●C=(1/2)x(2b.mcf×($1/mcf=$1 billion Chapter 9 Slide 15
Chapter 9 Slide 15 ◼ Measuring the Impact of Price Controls ⚫ 1 Tcf = 1 billion mcf ⚫ If QD = 18, then P = $2.40 ◆[18 = -5PG + 3.75(8)] ⚫ A = (18 billion mcf) x ($1/mcf) = $18 billion ⚫ B = (1/2) x (2 b. mcf) x ($0.40/mcf) = $0.4 billion ⚫ C = (1/2) x (2 b. mcf) x ($1/mcf) = $1 billion Price Controls and Natural Gas Shortages