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Energy Efficiency: Efficiency or Monopsony?

Timothy Brennan

No 09-110, UMBC Economics Department Working Papers from UMBC Department of Economics

Abstract: The cliché in the electricity sector, the "cheapest power plant is the one we don’t build," seems to neglect the benefits of the energy that plant would generate. Those overall benefits could be countered by benefits to consumers if "not building that plant" was the result of monopsony. A regulator acting as a monopsonist may need to avoid rationing demand at monopsony prices. Subsidizing energy efficiency to reduce electricity demand at the margin can solve that problem, if energy efficiency and electricity use are substitutes. We may not observe these effects if the regulator can set price as well as quantity, lacks buyer-side market power, or is legally precluded from denying generators a reasonable return on capital. Nevertheless, the possibility of monopsony remains significant in light of the debate as to whether antitrust enforcement should maximize consumer welfare or total welfare.

Keywords: energy efficiency; monopsony; consumer welfare; total welfare; electricity (search for similar items in EconPapers)
JEL-codes: L51 L94 L12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2009-05-01, Revised 2009-05-01
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