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Economics of collective monitoring: a study of environmentally constrained electricity generators

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  • J. Contreras

    () (Universidad de Castilla–La Mancha)

  • J. B. Krawczyk

    (Victoria University of Wellington)

  • J. Zuccollo

    (HEFCE)

Abstract

Abstract This paper investigates the costs of monitoring of a distributed multi-agent economic activity in the presence of constraints on the agents’ joint outputs. If the regulator monitors agents individually she calculates each agent’s optimal contribution to the constrains by solving a constrained welfare-maximisation problem. This will maximise welfare but may be expensive because monitoring cost rises with the number of agents. Alternatively, the regulator could monitor agents collectively, using a detector, or detectors, to observe if each constraint is jointly satisfied. This will ease implementation cost, but lower welfare. We define the welfare difference between each regime of monitoring for a fairly inclusive electricity generation model and formulate some predictions. The behaviour of two generators in a coupled-constrained, three-node case study reproduces these predictions. We find that the welfare loss from collective monitoring can be small if the constraints are tight. We also learn that, under either regime, the imposition of transmission and environmental restrictions may benefit the less efficient generator and shift surplus share towards the emitters, decreasing consumer surplus.

Suggested Citation

  • J. Contreras & J. B. Krawczyk & J. Zuccollo, 2016. "Economics of collective monitoring: a study of environmentally constrained electricity generators," Computational Management Science, Springer, vol. 13(3), pages 349-369, July.
  • Handle: RePEc:spr:comgts:v:13:y:2016:i:3:d:10.1007_s10287-015-0247-9 DOI: 10.1007/s10287-015-0247-9
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    References listed on IDEAS

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    Cited by:

    1. Jacek B. Krawczyk & Mabel Tidball, 2016. "Economic Problems with Constraints: How Efficiency Relates to Equilibrium," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 18(04), pages 1-19, December.

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