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Energy Economics pp 277–297Cite as

Energy Markets and Principles of Energy Pricing

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Abstract

This chapter introduces the economic concepts related to pricing of energy in different market conditions. The chapter starts with the basic competitive market model and discusses the extensions required to analyse specific features (such as indivisibility of capital, specificity of assets, capital intensiveness, etc.) of the energy sector. The chapter also covers the issue of market failure and presents the commonly used market interventions in such situations. The concept of cost-benefit analysis is used as the framework for most of the analysis.

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Notes

  1. 1.

    This presentation follows Rees (1984). Also see Munasinghe (1985).

  2. 2.

    This is an area of continuous debate in the economic literature. A summary of the debate is provided in Chap. 13.

  3. 3.

    Please refer to Chap. 9 for further details.

  4. 4.

    The total revenue is given by TR = P · Q, where P = price and Q = output. Marginal revenue is then \( \frac{dTR}{dQ} = P + Q\frac{dP}{dQ} \), or MR = P(1 + 1/e), where MR = marginal revenue and e = price elasticity of demand. As e is less than 1, MR is less than P.

  5. 5.

    Economies of scope imply the potential of cost saving from joint production. This is possible because the firm can make better use of facilities and services for producing a certain mix of different outputs than leaving the production of individual products to specialty firms.

  6. 6.

    Interested readers may consult the following: Diamond and Mirrlees (1971), Feldstein (1972).

  7. 7.

    However, the market failure argument has been subjected to serious scrutiny. See Robinson (2004) for such a viewpoint.

References

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  • Diamond PA, Mirrlees JA (1971) Optimal taxation and public production, II: Tax rules. Am Econ Rev 61:261–278

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  • Feldstein MS (1972) Distributional equity and the optimal structure of public prices. Am Econ Rev 62:32–36

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  • IEA (1996) The role of IEA Governments in energy, International Energy Agency, Paris. http://www.iea.org/textbase/nppdf/free/1990/role_energy1996.pdf

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  • World Bank (2004) Reforming infrastructure: privatisation, regulation and competition. World Bank (see http://econ.worldbank.org/files/36237_complete.pdf). Accessed 5 Jan 2005

Further Reading

  • Dahl C (2004) International energy markets, understanding pricing, policies and profits. PennWell, Tulsa

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  • Datta-Chaudhuri M (1990) Market failure and government failure. J Econ Perspect 4(3):25–39

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  • Devarajan S, Fisher AC (1981) Hotelling’s economics of exhaustible resources: fifty years later. J Econ Lit 19:65–73

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  • Fisher AC (1981) Chapter 2. In: Fisher AC (ed) Resource and environmental economics. Cambridge University Press, London

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  • Krautkraemer JA (1998) Non-renewable resource scarcity. J Econ Lit 36:2065–2107

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  • Robinson C (2004) Markets, imperfections and the dangers of over-regulating energy markets. Econ Aff June:52–55

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Authors and Affiliations

  1. Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Dundee, UK

    Subhes C. Bhattacharyya

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  1. Subhes C. Bhattacharyya
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Correspondence to Subhes C. Bhattacharyya .

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Bhattacharyya, S.C. (2011). Energy Markets and Principles of Energy Pricing. In: Energy Economics. Springer, London. https://doi.org/10.1007/978-0-85729-268-1_12

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  • DOI: https://doi.org/10.1007/978-0-85729-268-1_12

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  • Print ISBN: 978-0-85729-267-4

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