Question

Recall exercise 2 from Chapter 5 in which a country imposes an import fee on the crude oil it imports. Assume that prior to the imposition of the import fee, the country annually consumed 900 million short tons of coal, all domestically mined, at a price of $66 per short ton. How would the CBA of the import fee change if, after imposition of the import fee, the following circumstances are assumed to result from energy consumers switching from crude oil to coal?

a. Annual consumption of coal rises by 40 million short tons, but the price of coal remains unchanged.

b. Annual consumption of coal rises by 40 million short tons and the price of coal rises to $69 per short ton. In answering this question, assume that the prices of other goods, including coal, were not held constant in estimating the demand schedule for crude oil.

Answer 1

a) as long as the price of the coal remains same and the other distortations are not done to the coal in the secondary market, the rise in annual consumption by 40% or by any amount of percentage is not going to have any impact in the primary market of crude oil in terms of changes in social surplus estimation.

b) in this part , there is an assumption that the prices of other goods, including coal, were not held constant in estimating the demand schedule for crude oil, the demand curve of crude oil would come out to be in an equilibrium demand curve.

Furthermore, secondary market price changes of coal is not relevant here.