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EMDV8078-Assignment Oral Presentation

EMDV8078 Introduction to Environmental and Resource Economics Weekly assignment

Tutorial 5/week 6 (Semester 1, 2012) Energy
Assignment questions: Q1: Do energy prices do a good job in sending signals to consumers and producers about resource scarcity? Justify your answer.
Energy such as gas and fuel are considered non-renewable due to their limited stock, which cause scarcity problem due to consumption. Price plays effective role in signalling the resource scarcity; as resource become rare, more efforts and costs are needed to extract them and suppliers tend to reduce their current supply for future better price. In this event, price increase can results in:
More efficient in resource use Technology improvement and innovation, more effort in searching for substitutes such as

bio-fuel, solar, wind, nuclear, etc As an example, when the fuel price increase due to both its scarcity and supply control by OPEC, traveller will try to reduce their consumption by reducing their holiday travel and use their own transport only for high-value purposes; they also use more public transport which is cheaper. Consumers become more efficient in their resource consumption. The market will response to price increase, according to the principle of invisible hand, and regulate the demand and supply towards efficiency. In another case where price increase in line with the increasing purchasing power (i.e., better income) or at the discount rate according to Hotellings rule, price can help keeping the consumption more stable. In addition, due to profit incentive from high price, companies will increase their research for better technologies for resource extraction, exploring more supply sources as well as substitutes.

Q2: What are peak load prices? How do they work to reflect resource scarcity?
Peak Load Pricing is a pricing strategy in which price of good will be set at the highest level during times when demand is at a peak. This strategy is an attempt to shift demand to

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EMDV8078-Assignment Oral Presentation

accommodate supply to avoid supply shortage of scare resource during peak hour or peak season. If a good is priced at a high cost and many demand it, a capacity will be balanced. Peak-load price helps balances supply in demand by encouraging consumers to purchase at lower prices at off-peak period and still provides consumers willing to pay the increased price of the good or service. For example, during high demand season (holiday season), fuel price goes up to avoid the shortage of supply because when fuel is limited in availability, peak load pricing can effectively reduce consumer consumption because consumers are influenced by the high prices which affect their purchasing power as well. Graph: Normal price and peak-load price and shift of the demand curve

$ S 1 P Price eak

Norm Price al D2

D1