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Regulatory Tailoring, Reliability, and Price Volatility with Stochastic Breakdowns

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  • Gruenspecht, Howard

Abstract

Although real-world energy supply systems are subject to stochastic failures, the impacts of proposed regulations affecting these systems have typically been evaluated using non-stochastic models. This paper develops an energy market model that explicitly allows for stochastic failures and demonstrates they play an important, or even dominant, role in determining the market impacts of environmental regulations that tailor product specifications to address local or regional conditions, such as fuel-formulation requirements specific to certain regional markets within the United States. While traditional non-stochastic analyses view the tailoring of regulatory requirements by location as an efficiency-enhancing alternative to a "one size fits all" regulatory approach, they fail to consider the adverse impact on reliability in all market segments resulting from the loss of product fungibility due to tailoring. We show that regulatory impact estimates developed without explicit consideration of reliability considerations may be highly inaccurate.

Suggested Citation

  • Gruenspecht, Howard, 2002. "Regulatory Tailoring, Reliability, and Price Volatility with Stochastic Breakdowns," Discussion Papers dp-02-37, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-02-37
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-02-37.pdf
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    References listed on IDEAS

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    1. Sheshinski, Eytan & Dreze, Jacques H, 1976. "Demand Fluctuations, Capacity Utilization, and Costs," American Economic Review, American Economic Association, vol. 66(5), pages 731-742, December.
    2. Kenneth J. Arrow & David Levhari & Eytan Sheshinski, 1972. "A Production Function for the Repairman Problem," Review of Economic Studies, Oxford University Press, vol. 39(3), pages 241-249.
    3. Levhari, David & Sheshinski, Eytan, 1970. "A Microeconomic Production Function," Econometrica, Econometric Society, vol. 38(3), pages 559-573, May.
    4. Mulligan, James G, 1983. "The Economies of Massed Reserves," American Economic Review, American Economic Association, vol. 73(4), pages 725-734, September.
    5. Mulligan, James G., 1986. "Technical change and scale economies given stochastic demand and production," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 189-201, June.
    6. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    reliability; boutique fuels; gasoline price spikes; stochastic failures; environmental regulation; tailored regulation;

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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