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ECO 435 – Introduction and Overview

ECO 435 – Introduction and Overview. David Loomis. Four Categories of Suspect Behavior. Prices “too high” reflecting monopoly power Prices “too low” implying predatory pricing Prices “too high” for some and “too low” for others – undue discrimination

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ECO 435 – Introduction and Overview

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  1. ECO 435 – Introduction and Overview David Loomis

  2. Four Categories of Suspect Behavior • Prices “too high” reflecting monopoly power • Prices “too low” implying predatory pricing • Prices “too high” for some and “too low” for others – undue discrimination • Prices “unstable” making it difficult for producers and consumers to plan ahead

  3. Five Characteristics of Natural Monopoly Products • Capital-intensive – high fixed costs • Viewed as necessities – essential to community • Non-storable – subject to fluctuating demand • Produced in favored locations – yielding rents • Direct connections with customers

  4. Eight Traditional Rate-making Goals • Simplicity and public acceptance • Freedom from controversy • Revenue sufficiency • Revenue stability • Stability of rates • Fairness is apportionment of total costs • Avoidance of undue rate discrimination • Encouragement of efficiency

  5. History • 1970s: Regulation and Economics Diverge – OPEC • 1980s and 1990s: Natural Gas Deregulation FERC 436 and 636 • 1990s to present: Electric Deregulation Comes of Age

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