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APPENDIX Price Suppression In Economic Theory

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.

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APPENDIX Price Suppression In Economic Theory

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  1. 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)

  2. Energy Supply Cost Function MC MC MCsupply MC1 Q S1 Figure 1

  3. Energy Efficiency Cost Function(right origin) MC MC MCdemand Q D1 Max Achievable Figure 2

  4. Energy Supply and Efficiency Initial Resource Allocation:Vertical Integration MC MC MCsupply MCdemand (S1 , D1) MC1 Q D1 S1 Max Achievable Figure 3

  5. Energy Supply and Energy Efficiency Least-Cost Resource ReallocationVertical Integration MC MC MCsupply MCdemand (S1 , D1) MC1 (S2 , D2) MC2 Q D1 S1 Max Achievable S2 D2 Figure 4

  6. Benefits From Least-Cost Resource ReallocationVertical Integration MC MC MCsupply MCdemand (S1 , D1) MC1 (S2 , D2) MC2 A Q D1 S1 Max Achievable S2 D2 Figure 5

  7. Benefits of Resource Reallocation • Vertical integration Net benefits = A = total cost savings from substituting D2– D1 of efficiency at Mcdemand for S1-S2 of supply at Mcsupply

  8. Energy Supply and Efficiency Initial Resource Allocation:Wholesale Supply Competition MC MC MCsupply MCdemand (S1 , D1) MC1 (S2 , D2) MC2 Q D1 S1 Max Achievable S2 D2 Figure 6

  9. Energy Supply and Energy Efficiency Least-Cost Resource ReallocationWholesale Supply Competition MC MC MCsupply MCdemand (S1 , D1) MC1 (S2 , D2) MC2 Q D1 S1 Max Achievable S2 D2 Figure 7

  10. Benefits From Least-Cost Resource ReallocationWholesale Supply Competition MC MC MCsupply MCdemand (S1 , D1) MC1 C B (S2 , D2) MC2 A R Q D1 S1 Max Achievable S2 D2 Figure 8

  11. 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 MC2instead of at MC1

  12. Benefits of Resource Reallocation • 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

  13. Price Suppression from Additional Supply MC MC Old MCsupply MCdemand MC1 New MCsupply C (S2 , D2) (S1 , D1) MC2 (S3 , D3 R Q D1 S1 Max Achievable D2 S2 S3 D3 Figure 9

  14. Benefits of Supply Expansion • Wholesale competition (continued) SEIPE = supply expansion induced price effect = price suppression = C = (MC1 – MC2) S1 R = remaining producer surplus from sales of S1@ MC2 S3D3New least-cost resource allocation S3>S2,, D3<D2

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