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Measuring Welfare in Restructured Electricity Markets

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  • Erin T. Mansur

    (Associate Professor, Yale School of Management)

Abstract

Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method to measure competition, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model's estimates by 13%-21%. In contrast, my method finds that actual costs were only between 3% and 8% above the competitive levels. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Erin T. Mansur, 2008. "Measuring Welfare in Restructured Electricity Markets," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 369-386, May.
  • Handle: RePEc:tpr:restat:v:90:y:2008:i:2:p:369-386
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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