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Answer to Question #46652 in Macroeconomics for claudette

Question #46652
during a discussion several years ago on building a pipeline to alaska to carry natural gas the us senate passed a bill stipulating that there should be a guranteed minimum price for the natural gas that would be carried through the pipeline. the thinking behing thr bill was that if private firms had guaranteed price for their natural gas they would be more willing tondrill for gas and to pay to build the pipeline.
a. using the demand and supply framework predict the effects of this price floor on the price quantity demanded and quantity supplied.
b. with the enactment of this price floor for natural gas what are some of the likley unintended connsequences in the matket?
c. suggest some polices other than the price floor that the goverment can pursue if it wishes to encourge drilling for natural gas and for a new pipeline in alaska
Expert's answer
a. A price floor set above the market equilibrium price has several side-effects. Consumers find they must now pay a higher price for the same product. As a result, they reduce their purchases or drop out of the market entirely. Meanwhile, suppliers find they are guaranteed a new, higher price than they were charging before. As a result, they increase production. Taken together, these effects mean there is now an excess supply (known as a "surplus") of the product in the market to maintain the price floor over the long term. The equilibrium price is determined when the quantity demanded is equal to the quantity supplied.
b. With the enactment of this price floor for natural gas there are some of the likley unintended connsequences to appear: the equilibrium price for gas will rise and the consumption of gas will fall.
c. The goverment can encourage the suppliers with the implemention of tax-free carrying of the gas or to compensate the difference in price, if it will be lower - to provide dotations to suppliers, if it wishes to encourge drilling for natural gas and for a new pipeline in alaska

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