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Regulatory Tailoring, Reliability, and Price Volatility with Stochastic Breakdowns

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  • Gruenspecht, Howard
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    Abstract

    Although real-world energy supply systems are subject to stochastic failures, the impacts of proposed regulations affecting these systems have typically been evaluated using non-stochastic models. This paper develops an energy market model that explicitly allows for stochastic failures and demonstrates they play an important, or even dominant, role in determining the market impacts of environmental regulations that tailor product specifications to address local or regional conditions, such as fuel-formulation requirements specific to certain regional markets within the United States. While traditional non-stochastic analyses view the tailoring of regulatory requirements by location as an efficiency-enhancing alternative to a "one size fits all" regulatory approach, they fail to consider the adverse impact on reliability in all market segments resulting from the loss of product fungibility due to tailoring. We show that regulatory impact estimates developed without explicit consideration of reliability considerations may be highly inaccurate.

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-02-37.pdf
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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-02-37.

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    Date of creation: 01 Sep 2002
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    Handle: RePEc:rff:dpaper:dp-02-37

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    Related research

    Keywords: reliability; boutique fuels; gasoline price spikes; stochastic failures; environmental regulation; tailored regulation;

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    1. Sheshinski, Eytan & Dreze, Jacques H, 1976. "Demand Fluctuations, Capacity Utilization, and Costs," American Economic Review, American Economic Association, vol. 66(5), pages 731-42, December.
    2. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    3. Levhari, David & Sheshinski, Eytan, 1970. "A Microeconomic Production Function," Econometrica, Econometric Society, vol. 38(3), pages 559-73, May.
    4. Arrow, Kenneth J & Levhari, David & Sheshinski, Eytan, 1972. "A Production Function for the Repairman Problem," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 241-49, July.
    5. Mulligan, James G, 1983. "The Economies of Massed Reserves," American Economic Review, American Economic Association, vol. 73(4), pages 725-34, September.
    6. Mulligan, James G., 1986. "Technical change and scale economies given stochastic demand and production," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 189-201, June.
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