1
School of Social Sciences
Universiti Sains Malaysia
Semester 1, 2020/2021
SEU337 Energy Economics
Tutorial 2
(1) Suppose that the government wants to protect the industry that uses coal as an input. Thus,
the government sets the maximum price in the coal market. The maximum price is less
than the market equilibrium price. If there is a shortage of coal in the market, the
government will subsidize so that the coal firm will sell the quantity demanded in the
market and that shortage can be eliminated. Using a diagram, show the amount of subsidy
required and the deadweight loss (if any). Explain.
(2) The government wants to reduce the use of coal in manufacturing plants. Suppose that
demand and supply in LPG market are
Qd = 40 – 5Pd invert → Pd = 8 – 0.2Qd
Qs = – 10 + 2Ps invert → Ps = 5 + 0.5Qs
(a) If an ad valorem tax of 20% have been imposed on producer price, calculate new
equilibrium quantity, producers price, consumers price, tax paid by consumers, tax
paid by producers, total tax collected by government, and deadweight loss. Use a
diagram to support your answer.
(b) If an ad valorem tax of 30% have been imposed on consumer price, calculate new
equilibrium quantity, producers price, consumers price, tax paid by consumers, tax
paid by producers, total tax collected by government, and deadweight loss. Use a
diagram to support your answer.