In the previous model exercise, you have chosen price signals, such as the electricity price, taxes, and subsidies to which the firms in the model react. The model calculates the results, but it is up to the modeller (you) to interpret and explain these results.

Pick a result from your work with the model that you found surprising. Think about this result: what happened and why did it happen?

For example, if you implement a tax on CO₂, the firm using coal produces less but emissions decrease even more strongly. Furthermore, supply goes down and your market will not be balanced anymore. So, the electricity price has to be increased to balance the market again, and this brings the coal-fired power plant back into the market.

What happens here is that the CO₂ tax increases the costs of producing electricity with a coal-fired power plant. The firm using this plant will increase abatement efforts and produce less to cope with this. Thus, emissions and output go down. As the market price remains unchanged first, the firms using nuclear and renewables will not change their behaviour (they do not emit CO₂ and thus do not respond to the tax). Increasing the market price gives all firms an incentive to produce more, so that the market can be balanced.

Try to understand your result in a similar way and write down what you did, what happened and how you explain what happened:

1. What kind of changes (prices, taxes, subsidy) did you implement?
2. Which responses of the firms did you observe?
3. How do you explain these responses?