Let’s take some time to recap and apply what we have learned about model purpose and model design as well as exogenous and endogenous model variables.

Assume that you want to model the behaviour of an electricity supplier that runs a coal-fired power plant. The supplier can run this plant at different levels of production and can use different types of coal. These choices will result in more or less emissions per kWh (kilowatt hour) electricity. You want to explain how this supplier would react to a tax on CO₂ emissions.

Reflect how this setting can be described in a model:

1. What kind of building block would you use and why?

2. Which variables do you have? Which are endogenous and which are exogenous variables?

3. Assume that you also want to describe the effect of the CO₂ tax on the price of electricity. What would you need to change in your model?

We encourage you to make a note of your answers.