Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency

Severin Borenstein and James Bushnell

American Economic Journal: Economic Policy, 2022, vol. 14, issue 4, 80-110

Abstract: Economists favor pricing pollution in part so that consumers face the full social marginal cost (SMC) of goods and services. But even absent externalities, retail electricity prices typically exceed private marginal cost, due to a utility's need to cover average costs. Furthermore, the SMC of electricity can fluctuate widely hour-to-hour, while retail prices do not. We show that residential electricity rates exceed average SMC in most of the US, but there is large geographic and temporal variation. This finding has important implications for pass-through of pollution costs, as well as for policies promoting dynamic pricing, alternative energy, and reduced electricity consumption.

JEL-codes: D62 L94 L98 Q42 Q53 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (24)

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Working Paper: Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency (2018)
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DOI: 10.1257/pol.20190758

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