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7.4 Oil: National Security Problem Embargos are not certain events---they may never occur. Domestic steps can be taken to reduce vulnerability of the remaining imports. Accelerating domestic production would incur a user cost by lowering the amounts available to future users. 7.4 Oil: National Security Problem Some of the policy choices to reduce the vulnerability of imports: Energy conservation by means of a tax on energy consumption Subsidization of domestic supply A tariff on imports equal to the vertical distance between Sfo and Sf1 or a quota on imports equal to Q4-Q2 7.4 Oil: National Security Problem Some redistributive consequences by using tariffs or quotas: If a tariff were imposed on imports equal to P1-P0, the area ABCD would then represent tariff revenue collected by the government. If a quota system were used and the quotas were simply given to importers, area ABCD would represent the value of those quotas to the importers. The effect of either system on domestic producer surplus should also be noticed. Producers of domestic oil would be better off with a tariff or quota on imported oil than without it 7.5 Transition Fuels: Environmental Problems The fuels receiving the most attention as transition fuels are coal and uranium. The main issue defining the role for these two fuels involves their environmental impact. 7.5 Transition Fuels: Environmental Problems Coal’s main drawback is its contribution to air pollution: acid-rain problem, greenhouse Note: if those who burn coal fail to consider these environmental costs, the market will foster an excessive reliance on coal. The limitation of uranium is safety. Nuclear accidents The storage of radioactive waste 7.5 Transition Fuels: Environmental Problems Can we expect the market to make the correct choice with respect to nuclear power? The answer is no because of externalities. Would the utility have an incentive to choose the efficient level of precaution? 7.5 Transition Fuels: Environmental Problems If
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