Arnold Kling

Getting the Price Right

Arnold Kling, Great Questions of Economics
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On electricity deregulation, Lynn Kiesling writes,

Fixed, regulated rates insulate customers from the price decreases or increases that excess supply or demand would produce, and from the financial risk that often occurs in markets for commodities like electricity...

Inefficient energy consumption and production is the logical consequence of this disconnect, which means that fixed average rates do not satisfy either static efficiency conditions, or dynamic efficiency conditions that induce optimal capital investment in the electricity system.

California's "deregulation" of electricity maintained this fixed-rate structure, insulating the end-users from market reality. In my opinion that is why it blew up.

Discussion Question.My electric company offered me an alternative to its regular pricing. I pay a lower rate per kilowatt-hour, in exchange for which the utility can shut off my air conditioning for short periods when overall system demand is heavy. How does this approach contribute to static and dynamic efficiency?

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