Question

The COVID-19 pandemic is, for all intents and purposes, causing a worldwide economic recession, with businesses shutting their doors and many people out of work. Consider the market for electricity during this crisis. Draw a diagram for each of these situations.

(a) What effect does COVID-19 have on supply and demand in the market for electricity? (5%)

(b) Suppose that the government considers banning electricity bills until the COVID-19 subsides. What effect might this have on the market for electricity? (5%)

(c) Instead of the proposal in (b), the government consider subsidizing the market for electricity. What effect would this have on the market for electricity? (5%)

(d) Is there an argument, based on externalities, for subsidizing electricity? (5%)

Answer 1

1.Effect of Covid-19 on supply and demand for electricity would be that now onwards people would want to stay at home only.Many MNCs have asked their employees to work from home in this case all are working from home , cost and burden on electricity have just got doubled.Demand is more and supply is affected as now we dont produce enough electricity.Children are staying at home they are watching their shows on televisions , laptops and on phones .So one can not deny the burden on electricity has tremendously increased due to covid-19.

2.If government considers banning electricity bills until the covid -19 subsides, it will put major burden on government as well as private producers of electricity because if there will be no revenue generation ,they will not be able to cope up with the situation.Also it will hamper the economic growth of the country.

3.Subsidizing the rates will also not improve the condition because right now we are going through a huge problem globally.If people will pay subsidized rates also then also we wont be able to generate enough revenue.

4.Based on externalities, subsidizing rates of electricity would come under positive externality because thought behind this would be social welfare.