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APPENDIX Price Suppression In Economic Theory. Supply vs. Efficiency Resource Allocation Vertical Integration (Slides 2 through 7) Wholesale Competition (Slides 8 through 12) Supply Expansion Under Wholesale Competition (Slides 13 and 14). Energy Supply Cost Function. MC. MC. MC supply. - PowerPoint PPT Presentation
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APPENDIXPrice Suppression In Economic Theory• Supply vs. Efficiency Resource Allocation– Vertical Integration (Slides 2 through 7)– Wholesale Competition (Slides 8 through 12)
• Supply Expansion Under Wholesale Competition (Slides 13 and 14)
1
Energy Supply Cost Function
MCsupply
MC MC
Q
2Figure 1
S1
MC1
Energy Efficiency Cost Function(right origin)
MCdemand
MC MC
MaxAchievable
Q
3Figure 2
D1
Energy Supply and Efficiency Initial Resource Allocation:
Vertical Integration
MCdemand
MC MC
(S1 , D1)
MaxAchievable
Q
S1 D1
MC1
4Figure 3
MCsupply
Energy Supply and Energy Efficiency Least-Cost Resource Reallocation
Vertical Integration
MCdemand
MC MC
(S1 , D1)
(S2 , D2)
MaxAchievable
Q
S1 D1
S2 D2
MC1
MC2
5Figure 4
MCsupply
Benefits From Least-Cost Resource ReallocationVertical Integration
MCdemand
MC MC
(S1 , D1)
(S2 , D2)
MaxAchievable
Q
S1 D1
S2 D2
MC1
MC2
6Figure 5
MCsupply
A
Benefits of Resource Reallocation
1. Vertical integration
Net benefits = A
= total cost savings from substituting D2 – D1 of efficiency at Mcdemand
for S1-S2 of supply at Mcsupply
7
Energy Supply and Efficiency Initial Resource Allocation:
Wholesale Supply Competition
MCdemand
MC MC
(S1 , D1)
(S2 , D2)
Q
S1 D1Max
Achievable
S2 D2
MC2
MC1
8Figure 6
MCsupply
Energy Supply and Energy Efficiency Least-Cost Resource Reallocation
Wholesale Supply Competition
MCdemand
MC MC
(S1 , D1)
(S2 , D2)
Q
S1 D1Max
Achievable
S2 D2
MC2
MC1
9Figure 7
MCsupply
C C
Benefits From Least-Cost Resource ReallocationWholesale Supply Competition
MCdemand
MC MC
(S1 , D1)
(S2 , D2)
R
Q
S1 D1Max
Achievable
S2 D2
MC2
MC1
10Figure 8
A
B
MCsupply
Benefits of Resource Reallocation
2. Wholesale competition
Net benefits = A + B + C
B = producer surplus lost to consumers from reduction in sales of S1 – S2 at MC1
C = producer surplus lost to consumers on sales of S2 at MC2 instead of at MC1
11
Benefits of Resource Reallocation
2. Wholesale competition (continued)
DRIPE = demand reduction induced price effect
= price suppression= C / (D2 – D1)
= (MC1 – MC2) S2 / (D2 – D1)
R = producer surplus from remaining sales of S2 at MC2
12
Price Suppression from Additional Supply
MCdemand
MC MC
(S1 , D1)
(S3 , D3
Q
S1 D1
S3 D3
MC2
MC1
13Figure 9
Old MCsupply
New MCsupplyC
R
(S2 , D2)
S2D2
MaxAchievable
Benefits of Supply Expansion
2. Wholesale competition (continued)
SEIPE = supply expansion induced price effect= price suppression= C= (MC1 – MC2) S1
R = remaining producer surplus from sales of S1 @ MC2
S3D3 New least-cost resource allocation
S3>S2,, D3<D2
14
