Public Utility Finance and Pricing: A Reply

Short- and long-run marginal cost pricing: On their alleged equivalence

In this paper, an optimal airport-pricing model is derived, both with and without a constraint on the revenues, that includes all relevant external marginal costs. Given the results of the model, the implications on the profit of airports are discussed. It was found that, given that proceeds of the environmental charges are seen as revenue for the airport, it is not obvious that a marginal cost-pricing scheme would result in financial deficits for the airports, despite the reasonable assumption of increasing returns to scale in airport capacity. Using relatively crude estimates of the marginal costs, the current pricing scheme is compared with a marginal cost pricing scheme. Findings show that the effect on revenues of moving towards a marginal cost pricing scheme may not be so dramatic; especially not if the marginal external costs include estimated marginal costs of carbon dioxide emissions.

ABSTRACTA dynamic model for marginal cost pricing of port infrastructures links costs to system performance by combining a power-law function with time-dependent queueing analysis. Additionally, the model incorporates the marginal cost of capacity, including the effects of economies of scale. This allows the calculation of the marginal cost price under a dynamic framework. The model accounts for nonlinear behaviour of port demand, which is sensitive to price and service levels. The effects over time of cost and service levels on the port’s operational performance are quantified. The proposed model allows determining the optimal timing for capacity investment. The model is a starting point for the application of marginal cost pricing to ports. However, for practical application of such pricing method it is necessary to apply a system’s approach, as productivity and costs must be assessed at the terminal’s component level. This should allow the derivation of a marginal cost function at the terminal’s component level.

This approach aims to develop an algorithm for dealing with real time electricity price. The impact factors and cost of carbon dioxide emissions are contained in the calculation of electricity price. The derived theory is an initiative of green energy pricing mechanism in a power system. Standard IEEE-9 and 30-bus test systems and network branch data are put into practice to verify the model concepts. MATPOWER's dedicated open source Matlab-based program is the main substance for simulating AC optimal power flow. Marginal cost pricing and cost of marginal carbon emissions comprise the basic elements of electricity price. The uniform and location electricity price are calculated in the test systems separately. The results show this model is a very fast speed and accurate solution solvers of electricity price. Moreover, real time energy price with cost of carbon emissions makes users pay a little bit more for their electricity consumption. It is not only to have an attitude of seeking energy-saving, but even to achieve a basis structure of green energy pricing strategy.

What did Coase teach in the classroom? Coase’s articles reprinted in The Firm, the Market, and the Law make up 4 of 11 articles assigned in Coase’s 1972 course on “Economic Analysis and Public Policy.” This article reconstructs Coase’s 1972 syllabus, describes Coase as a teacher, reviews the part of his course devoted to the marginal cost controversy, and presents the lessons learned by a student in Coase’s course. Coase taught practical analysis, useful in law, business, and administration to law students. In addition to teaching the important ideas found in The Firm, the Market, and the Law, Coase taught the controversy surrounding marginal cost pricing. He assigned articles which criticized his views severely. His students learned about strongly opposing views and were expected to decide for themselves what they thought. Thus, Coase taught how discourse on public policy should be conducted. His classroom was a model of the “marketplace for ideas.” A close reading of the assigned materials on the marginal cost controversy reveals the connection Coase made between pricing schemes and economic development, revealing Coase’s view that marginal cost pricing would retard growth. Coase wrote about microeconomic policy decisions with an eye on the macroeconomic consequences. Coase taught that theory should not be allowed to stand in the way of progress.

This paper deals with the simultaneous determination of welfare-optimal pricing and investment rules under a multi-period ex ante maximum demand charge by allowing the possibility of purchasing electricity from third party generators at some cost when excess demand occurs. I show that at the optimal size of capacity, expected short-run marginal shortage cost and long-run marginal capacity cost should be equal. The optimal maximum demand tariff does not entail marginal cost pricing. In general, it is shown that maximum demand charges are welfare superior to marginal cost pricing when tariffs must be set ex ante, before demand is known.

It is generally accepted that the allocation of resources which will yield the maximum return in economic goods and services can be secured only when all prices are made to equal marginal costs. This definition of the optimum applies not only to industries which are normally competitive, or can be made so by antimonopoly action on the part of government, but equally to those industries the structural characteristics of which serve to make them natural monopolies, i.e., subject to long-run decreasing average total costs over a significant range of output. In the case of such decreasing cost industries, it has been shown that the optimum allocation of resources is secured by the use of the marginal cost or principle even if subsidization is found to be necessary to enable an operating unit to cover the full costs of production. This paper is not intended to elaborate or to discuss either the theoretical validity or the practical applicability of this principle. Rather it represents an attempt to predict or to project the possible results of the application of the marginal cost principle in one aspect of the railroad rate making problem. The particular aspect to be considered is that concerning the geographic or regional pattern of freight rates. It is assumed that the national government takes over control of the railroad system of the country and begins operations in accordance with the Lerner rule,' pricing services at the point where the marginal costs of providing the services in question are covered.2 It is accepted that marginal cost pricing or, in this case rate making, will not lead to the establishment of a uniform rate structure,3 simply due to the fact that the marginal costs of providing service will differ with the types of user, quantities taken, and with various geographic areas of provision. The possible differences in rates due to types of users, or to users of different quantities of the same service are not considered here. This discussion is limited to the possible differences in rates which may be charged to similar users of the same quantity of service who utilize the service in different geographic areas. It seems certain that even with the adoption of such a rule as the appropriate basis for rate making, rates will be set uniformly over rather broad contiguous

Developing concurrent investment plans for power generation and transmission

Recent literature on consistent conjectures has established that, under a variety of conditions, only competitive behavior is rational. Rationality or consistency is defined in this literature as the condition that the slope of a firm's profit-maximizing reaction function must equal the conjecture made about the firm's reactions by its rivals. This concept of consistency is due to Bresnahan [5], who uses it to select among the many possible conjectural equilibria in duopoly as defined by Bowley [3].' Perry [24] extends the duopoly analysis to the case of an arbitrary fixed number of identical firms, as well as to the case of free entry and exit. Both papers show that only the Bertrand conjecture, in which firms accommodate rivals' output changes by making equal and opposite changes, is consistent when marginal costs are constant. In addition, Perry shows that this result also holds when entry and exit are free. The Bertrand conjecture is identified with competitive behavior since it implies price taking and marginal cost pricing. The equivalence that both papers establish between consistent conjecture equilibrium (CCE) and competitive equilibrium under constant marginal cost may have important practical implications. Johnston summarizes his thorough survey of cost functions with the comment: Two major impressions, however, stand out clearly. The first is that the various short-run studies more often than not indicate constant marginal cost and declining average cost as the pattern that best seems to describe the data that have been analyzed [15, 168]. Therefore, the results of Bresnahan and Perry would seem to apply to a wide range of observed behavior, making a strong theoretical case that much economic activity is truly competitive regardless of the number of firms.2 Even when marginal costs are not constant and the number of firms is fixed, the implication of the consistent conjectures hypothesis for profit-maximizing firms is that behavior is more competitive than Coumot. This result in itself is important, since recent work has indicated that Cournot equilibrium approaches the competitive limit in the case of large economies; see for

Introduction, 342. — I. Theoretical development, 343; constant cost, 344; decreasing cost, 345; increasing cost, 353. — II. Electric light and power industry, 355. — III. The railroads, 363. — IV. The telephone industry, 369. — V. Conclusion, 371.

Harold Hotelling's celebrated theorem on the optimality of marginal cost pricing was criticized first by Frisch and later by Silberberg on the grounds that he did not use the marginal cost pricing condition in his original proof and hence that it did not constitute a valid proof. This note demonstrates that a key equation in Hotelling's proof is locally satisfied if and only if prices are set equal to marginal cost at the initial equilibrium and reexamines the validity of Hotelling's proof.

It is by now well known that in an economy with increasing returns, first‐best efficiency may be impossible to attain through an equilibrium concept based on market prices, even if firms are regulated to follow marginal cost pricing. We examine the efficiency issue in a special but important class of economies in which the only source of nonconvexities is the presence of fixed costs. Even in this context, it is possible that none of the equilibria based on marginal cost pricing are efficient (unless additional, strong assumptions are made). We argue that available results on the existence of an efficient two‐part tariff equilibrium rely on very strong assumptions, and we provide a positive result using a weak surplus condition. Our approach can also be used to establish the existence of an efficient marginal cost pricing equilibrium with endogenously chosen lump‐sum taxes if the initial endowment is efficient in the economy without the production technology.

Cooperative consumers in a deregulated electricity market — dynamic consumption strategies and price coordination

Biases in Static Oligopoly Models?: Evidence from the California Electricity Market

This paper is concerned with the allocation of cost and benefits from regional cooperation, with respect to reuse of municipal effluent for irrigation at the Ramla region of Israel. An efficient regional solution provides the maximal regional income which has to be redistributed among the town and several farms. Different allocations based on marginal cost pricing and schemes from cooperative game theory like the core, Shapley value, generalized Shapley value, and nucleolus are applied. The town and farm A have the main additional gains according to all allocation schemes presented. Advantages and disadvantages of these allocation schemes are examined in order to suggest a fair and acceptable allocation of the regional cooperative gains. Although no method has been preferred, the marginal cost pricing was found to be unacceptable by the participants. The conclusion is that the theory of cooperative games may provide guidelines while comparing the different solutions.