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Supply Function Equilibrium with Taxed Benefits


  • K. Ruddell

    () (Electric Power Optimization Centre, University of Auckland, Auckland 1010, New Zealand)

  • A. B. Philpott

    () (Electric Power Optimization Centre, University of Auckland, Auckland 1010, New Zealand)

  • A. Downward

    () (Electric Power Optimization Centre, University of Auckland, Auckland 1010, New Zealand)


Supply function equilibrium models are used to study electricity market auctions with uncertain demand. We study the effects on the supply function equilibrium of a tax, levied by the system operator, on the observed surplus of producers. Such a tax provides an incentive for producers to alter their offers to avoid the tax. We consider these incentives under both strategic and price-taking assumptions. The model is extended to a setting in which producers are taxed on the benefits accruing to them from a transmission line expansion (a beneficiaries-pay transmission charge). In this setting, we show how this tax may lead to lower prices in equilibrium.

Suggested Citation

  • K. Ruddell & A. B. Philpott & A. Downward, 2017. "Supply Function Equilibrium with Taxed Benefits," Operations Research, INFORMS, vol. 65(1), pages 1-18, February.
  • Handle: RePEc:inm:oropre:v:65:y:2017:i:1:p:1-18

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    Cited by:

    1. Blázquez De Paz, Mario, 2015. "Auction Performance on Wholesale Electricity Markets in the Presence of Transmission Constraints and Transmission Costs," Working Paper Series 1098, Research Institute of Industrial Economics.


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