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In 1981, when regulations were holding the price of natural gas below its free-market level, then-Congressman Jack Kemp of New York said the following in an interview with The New York Times : “We need to decontrol natural gas, and get production of natural gas up to a higher level so we can bring down the price.”17 Evaluate the Congressman’s statement.

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Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992

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BuyFindarrow_forward

Microeconomics: Principles & Policy

14th Edition
William J. Baumol + 2 others
Publisher: Cengage Learning
ISBN: 9781337794992
Chapter 4, Problem 8DQ
Textbook Problem
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In 1981, when regulations were holding the price of natural gas below its free-market level, then-Congressman Jack Kemp of New York said the following in an interview with The New York Times: “We need to decontrol natural gas, and get production of natural gas up to a higher level so we can bring down the price.”17 Evaluate the Congressman’s statement.

To determine

To analyze the given statement which requires the analysis of deregulation in theregulated natural gas market.

Explanation of Solution

Sometimes government holds the price of various commodities below the free market level price.This situation leads to an excess of demand over supply as people will demand more of a goodat a lower priceand seller will sell less at that lower price. This leads to a shortage of natural gas in the market.

When government removes the price control and let the market forces work freely, the sellers will charge the equilibrium price which will clear the market.

At equilibrium price, quantity supplied will be higher and the quantity demanded will be lower than the price ceiling level. Hence, there will be no shortage of natural gas, but the price will be higher now.

The Congressman is implying that the production of natural gas should increase after deregulation, which will lead to an increase in the supply of gas...

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