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Energy Efficiency: Efficiency or Monopsony?

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Abstract

The cliché in the electricity sector, the "cheapest power plant is the one we don’t build," seems to neglect the benefits of the energy that plant would generate. Those overall benefits could be countered by benefits to consumers if "not building that plant" was the result of monopsony. A regulator acting as a monopsonist may need to avoid rationing demand at monopsony prices. Subsidizing energy efficiency to reduce electricity demand at the margin can solve that problem, if energy efficiency and electricity use are substitutes. We may not observe these effects if the regulator can set price as well as quantity, lacks buyer-side market power, or is legally precluded from denying generators a reasonable return on capital. Nevertheless, the possibility of monopsony remains significant in light of the debate as to whether antitrust enforcement should maximize consumer welfare or total welfare.

Suggested Citation

  • Timothy J. Brennan, 2009. "Energy Efficiency: Efficiency or Monopsony?," UMBC Economics Department Working Papers 09-110, UMBC Department of Economics, revised 01 May 2009.
    • Handle: RePEc:umb:econwp:09110
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    File URL: http://www.umbc.edu/economics/wpapers/wp_09_110.pdf
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    References listed on IDEAS

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    1. Ken Heyer, 2006. "Welfare Standards and Merger Analysis: Why Not the Best?," CPI Journal, Competition Policy International, vol. 2.
    2. Brennan, Timothy J., 2010. "Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match?," Energy Policy, Elsevier, vol. 38(8), pages 3874-3885, August.
    3. Dennis W. Carlton, 2007. "Does Antitrust Need to be Modernized?," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 155-176, Summer.
    4. Brennan, Timothy, 2002. "Preventing Monopoly or Discouraging Competition? The Perils of Price-Cost Tests for Market Power in Electricity," RFF Working Paper Series dp-02-50, Resources for the Future.
    5. Richard J. Gilbert & David M. Newbery, 1994. "The Dynamic Efficiency of Regulatory Constitutions," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 538-554, Winter.
    6. Russell Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," EAG Discussions Papers 200709, Department of Justice, Antitrust Division.
    7. Russ Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," CPI Journal, Competition Policy International, vol. 3.
    8. Kenneth Heyer, 2006. "Welfare Standards and Merger Analysis: Why not the Best?," EAG Discussions Papers 200608, Department of Justice, Antitrust Division.
    9. Gary S. Becker, 1983. "A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(3), pages 371-400.
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    1. Brennan, Timothy J., 2010. "Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match?," Energy Policy, Elsevier, vol. 38(8), pages 3874-3885, August.
    2. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    3. Brennan, Timothy J., 2009. "The Challenges of Climate for Energy Markets," RFF Working Paper Series dp-09-32, Resources for the Future.

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    More about this item

    Keywords

    energy efficiency; monopsony; consumer welfare; total welfare; electricity;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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