Measuring Welfare in Restructured Electricity Markets

58 Pages Posted: 16 Oct 2007 Last revised: 1 Dec 2022

See all articles by Erin T. Mansur

Erin T. Mansur

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: October 2007

Abstract

Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method of measuring competitive behavior in these markets, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model's estimates by 13 to 21 percent. In contrast, my method finds that actual costs were only between three and eight percent above the competitive levels. In particular, it is the fringe firms whose costs increase, while strategic firms reduce production and costs.

Suggested Citation

Mansur, Erin T., Measuring Welfare in Restructured Electricity Markets (October 2007). NBER Working Paper No. w13509, Available at SSRN: https://ssrn.com/abstract=1021987

Erin T. Mansur (Contact Author)

Dartmouth College - Tuck School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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