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Question: Suppose the market for solar panels in Australia is competitive. a. Using the (market) demand and supply diagram, show the competitive market equilibrium. Label the competitive market equilibrium price and quantity pC and QC, respectively. (2 marks) Solar panel production reduces the amount of pollution that would have been created by alternative energy sources, like coal. b. Using the (market) demand and supply diagram, again, show the efficient equilibrium output. Label the efficient equilibrium output Qe. (4 marks) c. Briefly explain how the government can use a corrective tax or subsidy (which?), to get to the efficient output Qe. On the (market) demand and supply diagram, show the price to the buyers, Pb, and the price to the sellers, Ps, as a consequence of this government intervention. (6 marks) d. Using the diagram, do welfare analysis to show how much better off or worse off Australian consumers, producers and Australia as whole are from the corrective tax or subsidy from part c) (compared to the competitive market equilibrium). You may find it helpful to assign letters (A, B, C, etc) to refer to areas on your diagram. Be careful about the welfare analysis of Australians as a whole – you will need to think carefully about this.
As an AI, I'm unable to create or show diagrams. However, I can describe the process for conceptualizing the described situations. a) In a competitive market, the equilibrium price and quantity (pC and QC, respectively) are established at the intersection of the market demand and supply curves. This intersection represents the point at which the quantity of solar panels that consumers are willing and able to purchase equals the quantity that producers are willing and able to supply. b) White, for instance, the efficient equilibrium output (Qe) would be at a point where the social cost (production cost and external cost of pollution saved) equals the private benefit (consumer willingness to pay). Because the use of solar panels reduces pollution which can be considered as a positive externality, this point would be to the right of the competitive equilibrium point, indicating an increased quantity of solar panels. c) To drive the market from QC to Qe, the Australian government can impose a subsidy on solar panel production. This would encourage more production, lowering the net cost to producers (Ps) and so increase the quantity supplied. On the other hand, it does not affect the price for buyers (Pb) significantly. d) With a subsidy, consumer and producer surplus would be expected to increase. Consumers benefit from greater availability of solar panels and possibly lower prices. Producers, meanwhile, receive a subsidy which should cover the gap between the market price and their increased production costs. On balance, assuming the government is using tax revenues efficiently, Australia as a whole could be better off due to the reduction in pollution and consequent health and environmental benefits. Do note, though, that the specifics of welfare analysis would depand deeply on the shape of the supply and demand curves and the size of the subsidy. It's also worth noting that while this might increase overall welfare, that doesn't necessarily mean there might not be individual losers — for example, producers of traditional energy sources like coal.
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