Water Misallocation and Environmental Externalities in Electricity Generation
AbstractWe explore the interactions between environmental externalities and intertemporal market power in electricity generation industries where thermal operators imperfectly compete with operators using scarce water stored in dams. Relying upon a two-period model, we show that, in countries where demand peaks at the first (resp.ly, second) period after water renewal, dynamic market power worsens (resp.ly, ameliorates) resource allocation and environmental health. We then address policy issues. We show that, in general, second best is not decentralized by means of standard tools such as price cap. We argue that the hydraulic process requires specific regulation. We put forward a quantity-based version of the contracts for price difference increasingly used in power pools, to be adopted jointly with either a flexible form of taxation or an intertemporal price cap.
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Bibliographic InfoPaper provided by European University Institute in its series RSCAS Working Papers with number 2008/27.
Date of creation: 29 Jul 2008
Date of revision:
power generation; water allocation; externalities; price cap; contracts for water difference.;
Find related papers by JEL classification:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-06 (All new papers)
- NEP-ENE-2008-08-06 (Energy Economics)
- NEP-ENV-2008-08-06 (Environmental Economics)
- NEP-MIC-2008-08-06 (Microeconomics)
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- Pineau, Pierre-Olivier & de Villemeur, Étienne, 2009.
"Environmentally Damaging Electricity Trade,"
TSE Working Papers
09-118, Toulouse School of Economics (TSE).
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