MPE781 Economics For Managers Assignment

Questions

Question 1 – Trends in the Australian Gas Market

1. The following references discuss the factors that have contributed to the rising price of gas in the Australian (and international) markets. Use these references to prepare a list of demand and supply-side factors affecting the Australian gas market. Provide a brief explanation of how these factors are affecting the Australian gas market.
   • Australia's gas prices are surging. How did we get here and what is being done about it? | SBS News
   • Why are gas and electricity prices going up? | Climate Council (4 marks)
2. Consider the Australian, domestic market for gas. Based on your list of demand and supply-side factors from Q1(i), illustrate the changes to the Australian, domestic gas market. [Hint: When shifting both demand and supply, pay attention to the net effect these shifts have on the new equilibrium price and quantity]. Remember to fully label your diagram and provide a discussion that supports your illustration. (4 marks)

Question 2 – Welfare Analysis

The firms that produce gas have considerable market power and hence are typically considered to be monopolies. Monopoly firms are unchecked by competition and, therefore, the outcome in a monopoly market is often not in the best interest of society. The following question requires you to consider the welfare implications of a monopoly.

Draw a full-labelled diagram of a monopoly firm earning an economic profit. Show the firm’s profit maximising price and output, consumer surplus and producer surplus and deadweight loss. (4 marks)

Question 3 – Policy Analysis

Energy has become increasingly less affordable for consumers and firms in recent years and this is especially true for natural gas. Recent surges in gas prices have occurred against a backdrop of rising inflation rates here in Australia and overseas.

To curb the surge in gas prices, the Australian government is considering a series of regulatory approaches for gas producers. One proposes a cap on the price of gas and the other, a tax on the ‘windfall’ profits gas companies have earned as a result of the spike in gas prices.

The following 2 questions require you to consider the economic effects these policies will have on the market for gas and the firms that produce gas, respectively.

1. The gas industry has strong economies of scale and hence is best illustrated using a diagram for a natural monopoly. A natural monopoly has a constant marginal cost and a downward-sloping average total cost curve. Using a full-labelled diagram, evaluate how a cap on the price of gas would work to address rising gas prices. Show the effects of a price cap on the firm’s output and economic profit. Discuss who benefits and who loses from this policy approach. In your analysis, you should evaluate the effectiveness of this policy approach and consider any unintended consequences of this policy. (8 marks)
2. A windfall tax will increase the monopoly's fixed cost, as this tax can be seen as a fixed cost. Draw a full-labelled diagram of a natural monopoly firm earning an economic profit. Show the effects of a tax imposed on the economic profits these firms earn. Specifically, the firm’s profit-maximising price and output, consumer and producer surplus and deadweight loss. (8 marks)

Question 4 – The gas market over the long term

The transition to renewable energy is well underway in Australia and globally. This move towards renewables has implications for traditional energy markets, such as gas and electricity.

1. The shift to green energy requires substantial investments in renewables, while traditional energy faces reduced sustained investment. This could result in increased marginal costs for natural gas production, leading to more volatile energy prices in the short term. Using a full-labelled diagram for a natural monopoly, explain how the transition towards renewables is currently affecting the Australian gas market and gas prices. (8 marks)
2. As renewable energy gains momentum, the demand for traditional energy is poised to decline. Using a full-labelled diagram, explain how the continued shift into renewables will affect the gas market in the medium to long term. (4 marks)

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