The Short-Run Approach to Long-Run Equilibrium in Competitive Markets

A General Theory with Application to Peak-Load Pricing with Storage

Business & Finance, Economics, Theory of Economics, Industries & Professions, Industries
Cover of the book The Short-Run Approach to Long-Run Equilibrium in Competitive Markets by Anthony Horsley, Andrew J. Wrobel, Springer International Publishing
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Author: Anthony Horsley, Andrew J. Wrobel ISBN: 9783319333984
Publisher: Springer International Publishing Publication: October 19, 2016
Imprint: Springer Language: English
Author: Anthony Horsley, Andrew J. Wrobel
ISBN: 9783319333984
Publisher: Springer International Publishing
Publication: October 19, 2016
Imprint: Springer
Language: English

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.

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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.

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