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Figure 5.2. Efficient Rationing $/MWh
Demand
Capacity
Equilibrium price
{
Price
MWh
Demand reduction
Brazilian events. Since, with random rationing, consumers have the same likelihood of being rationed (i.e., independent of the value they place on electricity), the cost of unserved demand necessarily exceeds the minimum. In other cases, rationing is done according to specific administrative criteria. For example, it may be based on a distinction between industrial and residential consumption or between consumers in different geographical areas. To the extent that such criteria reflect consumer groups’ willingness to pay, the economic costs of rationing are correspondingly reduced.
Capacity The gain from increasing supply capacity equals the expected savings from a reduced incidence of shortages. Consequently, the optimal investment criterion compares the gain from fewer shortages to the cost of expanding capacity, known as “long-run marginal cost.”
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NILS-HENRIK M. VON DER FEHR