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Market failures and government policies in gas markets

  • Machiel Mulder
  • Gijsbert Zwart

    ()

In the past, the European gas market was dominated by state-owned monopolists but since the start of the liberalisation, privatisation and re-regulation in the early 1990s, the market has fundamentally changed. Nevertheless, governments are still involved in the gas industry, not only in gas exporting countries such as Russia, but also in a country like the Netherlands where the government has imposed a cap on production from the main gas field (Groningen) as well as owns shares in the main wholesale trader (Gasunie Trade & Supply) which has the obligation to accept all gas offered by producers on the small fields. In the main report of this project we present a cost-benefit analysis of the Dutch gas-depletion policy. In this memorandum we explore the natural-gas market more broadly, looking for factors why government intervention may be needed using the welfare-economic approach according to which government intervention should be based on the presence of market failures. After a brief description of the main characteristics of the gas industry, we systematically analyse sources of market failures, such as geopolitical factors, economies of scale and externalities, and finally go into the question which policy options may be chosen to address those market failures.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Memorandum with number 143.

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Date of creation: Feb 2006
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Handle: RePEc:cpb:memodm:143
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  1. Paul Joskow & Jean Tirole, 2004. "Reliability and Competitive Electricity Markets," Working Papers 0408, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Tanga McDaniel & Neuhoff, K., 2002. "Auctions to gas transmission access: The British experience," Cambridge Working Papers in Economics 0234, Faculty of Economics, University of Cambridge.
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  6. Machiel Mulder & Gijsbert Zwart, 2006. "Government involvement in liberalised gas markets; a welfare-economic analysis of Dutch gas-depletion policy," CPB Document 110, CPB Netherlands Bureau for Economic Policy Analysis.
  7. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  10. Toman, Michael A., 1993. "The economics of energy security: Theory, evidence, policy," Handbook of Natural Resource and Energy Economics, in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 3, chapter 25, pages 1167-1218 Elsevier.
  11. Dominique Finon & Catherine Locatelli, 2002. "The liberalisation of the European gas market and its consequences for Russia," Post-Print halshs-00177828, HAL.
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  14. Machiel Mulder & Victoria Shestalova & Mark Lijesen, 2005. "Vertical separation of the energy-distribution industry; an assessment of several options for unbundling," CPB Document 84, CPB Netherlands Bureau for Economic Policy Analysis.
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