| QUOTE |
| Economics 1101 Assignment 5 Due: Friday November 17th before 2:30pm in the drop-box at 6206 University Ave. The Government of Nova Scotia, effective December 1, 2006, will cut the 8 % provincial sales tax on home heating fuels, such as oil, wood, and electricity. Recently released, the Stern Review estimates that two-thirds of greenhouse gas emissions are from energy (production and consumption). The Review predicts massive environmental, social, and economic costs if greenhouse-gas emissions are not cut dramatically and quickly. Assuming that oil for home heating is supplied in a competitive market, explain each of the following with the aid of appropriate diagrams: a. How the current market equilibrium price of roughly 70 cents per litre, including the PST, is determined and indicate the equilibrium quantity of oil; (3 points) b. The efficiency of this market solution if there are no externalities involved in the extraction, transportation, refining, or burning of oil; (3 points) c. The implication for the efficiency of the perfectly competitive market in [b] if an application of the data in the Stern Review indicates that the social costs of the greenhouse gas emissions from using oil to heat our homes increase oil’s actual costs by 50 %; (4 points) d. Given the externalities which exist in [c], what would be the impact on emissions and efficiency levels when the government removes the 8 % PST on home energy sources; (4points) e. The impact on the efficiency levels in [c] if, instead of removing the PST, the provincial government added a 50% carbon tax on home heating oil (charged to the producer), and used some of the additional tax revenue to provide low income Nova Scotians with (1) an income supplement of $500 per month and (2) expanded energy efficiency programmes. (6 points) N.B. The above analysis applies to other fuels also receiving the PST removal, such as electricity (which is generated with fossil fuels) and wood – The Stern Review estimates that 18 % of greenhouse gas emissions are from deforestation. |