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Energy Efficiency: Efficiency or Monopsony?

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  • Brennan, Timothy J.

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    (Resources for the Future)

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    Abstract

    The cliché in the electricity sector, the “cheapest power plant is the one we don’t build,” seems to neglect the benefits of the energy that plant would generate. Those overall benefits could be countered by benefits to consumers if “not building that plant” was the result of monopsony. A regulator acting as a monopsonist may need to avoid rationing demand at monopsony prices. Subsidizing energy efficiency to reduce electricity demand at the margin can solve that problem, if energy efficiency and electricity use are substitutes. We may not observe these effects if the regulator can set price as well as quantity, lacks buyer-side market power, or is legally precluded from denying generators a reasonable return on capital. Nevertheless, the possibility of monopsony remains significant in light of the debate as to whether antitrust enforcement should maximize consumer welfare or total welfare.

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-09-20.pdf
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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-09-20.

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    Date of creation: 21 May 2009
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    Handle: RePEc:rff:dpaper:dp-09-20

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    Related research

    Keywords: energy efficiency; monopsony; consumer welfare; total welfare; electricity;

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    1. Dennis W. Carlton, 2007. "Does Antitrust Need to be Modernized?," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 155-176, Summer.
    2. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
    3. Kenneth Heyer, 2006. "Welfare Standards and Merger Analysis: Why not the Best?," EAG Discussions Papers 200608, Department of Justice, Antitrust Division.
    4. Russell Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," EAG Discussions Papers 200709, Department of Justice, Antitrust Division.
    5. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
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    Cited by:
    1. Timothy J. Brennan, 2009. "The Challenges of Climate for Energy Markets," UMBC Economics Department Working Papers 09-111, UMBC Department of Economics, revised 01 Sep 2009.
    2. Brennan, Timothy J., 2009. "The Challenges of Climate for Energy Markets," Discussion Papers dp-09-32, Resources For the Future.
    3. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    4. Brennan, Timothy J., 2010. "Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match?," Energy Policy, Elsevier, vol. 38(8), pages 3874-3885, August.

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