3314AFE Micro Foundations of Markets and Behavior Assessment 2 – Case Study

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Department of Accounting, Finance and Economics (AFE)

3314AFE Micro Foundations of Markets and Behaviour

Assessment 2 – Case Study

Background: Real World Scenario and Policy Dilemma

The current war in Ukraine has led to a curtailing of purchases of Russian oil and gas within the European Union (EU) as a matter of policy (see for example: https://www.iea.org/reports/a-10-point-plan-to-reduce-the-european-unions-reliance-on-russian-natural-gas), of which the EU member states are heavily dependent on for their economies and for day-to-day living (https://www.statista.com/statistics/1201743/russian-gas-dependence-in-europe-by-country/ has data on gas dependency for example).

Accentuating this issue is  that Russia is also curtailing supply further as a matter of policy, in order to increase the cost of energy within the EU states with a view of making the cost of their support for Ukraine high, and potentially ‘too high’, thus reducing their support for Ukraine, which would benefit the Russian Federation (see for example: https://www.cnbc.com/2022/09/06/energy-crisis-why-has-russia-cut-off-gas-supplies-to-europe.html and https://www.reuters.com/business/energy/europe-races-cut-russian-gas-usage-amid-new-putin-warning-2022-07-20/).

These two events, (i) the EU running a policy to reduce imports of Russian oil and gas, and (ii) the Russian Federation’s curtailing of supply of gas to the EU in particular, obviously leads to a fall in the supply of oil and gas available to the EU economies and people. The natural solution would be to find substitutes for these shortfalls; however, these take time, whether it is (i) oil and gas from other countries (e.g. oil from Saudi Arabia and liquefied natural gas [LNG] from Qatar) or (ii) switching the energy mix away from oil and gas, to non-carbon energy sources be it nuclear power (so not renewable energy but non-carbon energy) and/or renewable energy such as solar power or wind power. Thus, substitutes for Russian oil and gas cannot replenish the loss of Russian supply in the short-term. This, coupled with soaring energy prices, means that people within the EU states face not just higher prices for energy, but also potential rationing of supply (e.g. blackouts, lack of hot water) during the upcoming winter, from say December 2022 to March 2023.

This obviously has led to calls for government policies to ameliorate this hardship for consumers (and in effect for the economies of the member states). This emphasis on policy is the subject of this assessment, based on this real-life policy dilemma. The crux of the assessment is stated below:

You are an economist, and part of an inter-disciplinary team set-up within the purview of the office of the French Presidency. Thus your focus should be on the situation as it impacts on France only.

Your task, within the inter-disciplinary team, is as follows:

Part A

  • To evaluate (graphically and in words, no calculations necessary) the impact of the following policy option: a subsidy for nuclear energy production in order to boost the energy mix and thus reduce the reliance on oil and gas. This is particularly relevant for France as it already has nuclear power as part of its energy mix. Explicitly note the impact on buyers (i.e. consumers), sellers (i.e. producers) and on the quantity of nuclear energy used in the event the subsidy is introduced.
  • Find a historical case (anywhere in the world) where a policy was enacted to subsidise an energy source to reduce dependency on one form of energy, and summarise the effectiveness (or ineffectiveness) of the policy. Note why it succeeded (or failed), and how it could inform how effective (or ineffective) the theory you have presented in part (i) could be.

Part B

Upon reporting your evaluation to your inter-disciplinary team members, you begin to receive feedback from other disciplinary perspectives. One particular strong objection to the subsidy policy on nuclear energy comes from the team member with a background in environmental studies, who points out, in particular, the need to meet Sustainable Development Goal (SDG) 7.2: Increase Global Percentage of Renewable Energy. She points out that France has an opportunity to add renewable energy (for example, solar power) to the energy mix in France, and to help meet SDG 7.2 targets.

  • Given your analysis in Part A, consider the strengths and weaknesses of concentrating just on economic theory alone when formulating policy on France’s energy mix. How does economic theory help policymakers with energy policy, and what are its limitations?
  • Your team members and you agree to formulate an energy policy that can reduce French dependency on oil and gas in the very short-term (the Northern Hemisphere winter is quickly approaching) that accounts for both economic theories and/or models but also one (or two, if you prefer) theories and/or models from another discipline (or disciplines) that can produce a policy recommendation that is superior to what you highlighted in Part A(i). Briefly highlight this policy, and note how it is a better policy than the one you initially proposed.