ONE (“No Need to Argue”): The California Alternative Rates for Energy program (CARE) is a marginal energy price reduction program for low-income customers in California. The program reduces the retail cost of natural gas by 20% and provides up to a 35% reduction in electricity prices. The program covered almost 5 million households. A new economics paper was just released which examined both the efficiency of the program and the equity impacts of the program.
Part A: Scan the beginning of the paper (you really don’t need to look beyond the 4th page) and think about what a subsidy does to the equilibrium in gas and electricity markets. If the program were evaluated using the efficiency criteria as it pertains to climate change, demonstrate why it would fail the test.
Part B: Use the questions asked, and the results, in the paper to demonstrate how the “cold hearted, maximizing” tools of “efficiency” can actually help give a voice to the equity concerns that we have. Please illustrate.
TWO (“Feel the Bern”): Suppose that Donald owns a building that is worth $606 million to him. There is another person in the city, Bernie, who values the building at $1,312 million (we know this to be objectively true). Would it be efficient for the Mayor of the city to seize the Donald’s property and transfer it to Bernie? Explain.
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