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APPENDIX Price Suppression In Economic Theory

This document examines the concepts of price suppression and resource allocation within economic theory, focusing on the distinctions between supply and efficiency. It delves into vertical integration and wholesale competition, discussing how these concepts influence energy supply cost functions and the efficiency of resource allocation. Through various figures and examples, it highlights the benefits of least-cost resource reallocation under both vertical integration and wholesale competition, demonstrating their implications for supplier and consumer interaction.

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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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