The Short-Run Approach to Long-Run Equilibrium in Competitive Markets: A General Theory with Application to Peak-Load Pricing with Storage (Lecture Notes in Economics and Mathematical Systems, 684)

The authors present a new formal framework for finding the long-run competitive market equilibrium through short-run equilibria by exploiting the operating policies and plant valuations. This "short-run approach" develops ideas of Boiteux and Koopmans. Applied to the peak-load pricing of electricity generated by thermal, hydro and pumped-storage plants, it gives a sound and practical method of valuing the fixed assets--in this case, the river flows and the geological sites suitable for reservoirs. Its main mathematical basis is the producer's short-run profit maximization programme and its dual; their solutions have relatively simple forms that can greatly ease the fixed-point problem of solving for the general equilibrium. Since the optimal values (profit and cost functions) are usually nondifferentiable--this is so when there are joint costs of production such as capacity constraints--nonsmooth calculus is employed to resolve long-standing discrepancies between textbook theory and industrial reality by giving subdifferential extensions of basic results of microeconomics, including the Wong-Viner Envelope Theorem.-- Provided by publisher Front Matter....Pages i-x Introduction....Pages 1-13 Peak-Load Pricing with Cross-Price Independent Demands: A Simple Illustration....Pages 15-19 Characterizations of Long-Run Producer Optimum....Pages 21-71 Short-Run Profit Approach to Long-Run Market Equilibrium....Pages 73-89 Short-Run Approach to Electricity Pricing in Continuous Time....Pages 91-118 Existence of Optimal Quantities and Shadow Prices with No Duality Gap....Pages 119-135 Production Techniques with Conditionally Fixed Coefficients....Pages 137-154 Conclusions....Pages 155-156 Back Matter....Pages 157-195 Anthony Horsley, Andrew J. Wrobel. Includes Bibliographical References (pages 193-195).