China intends to increase natural-gas production eightfold over the next 17 years, so that it contributes 8 percent of the nation's energy supply, up from the current 1.6 percent. The reasons are that energy demand is rising five percent a year, coal produces too many environmental problems, and oil production has slowed.

1. Draw a diagram of the market for natural gas in China. Put the price on the vertical axis and the quantity traded on the horizontal axis. Add a supply curve and a demand curve and mark the equilibrium price at $75 per 1300 cubic yards.
a) Show what has happened as the supply of natural gas to domestic customers has increased (without a concomitant change in the demand for gas). Assume that the Chinese government has not changed the price of gas.
b) Is there a surplus or a shortage? Explain.
c) What is the government doing to restore equilibrium? Refer to the news story. Illustrate the implications of this for the disequilibrium position on your diagram.

2. Draw another diagram of the Chinese market for natural gas. Again, show the equilibrium price as $75.
a) In the future, it is predicted that demand will outstrip supply. Show an increase in demand, with supply constant, and price unchanged.
b) Is there a surplus or a shortage? Explain.
c) According to the news story, what might be done to remedy the problem? Illustrate the effect of this on the disequilibrium on your diagram.