Naïve Electricity Markets

Abstract

The push toward competition, market pricing, and less regulation in the electricity industry embraces the logic and elegance of markets. It means that participants are exposed to more price risk than in the past, and it represents a narrowing of both the notion of the public interest and the government’s role in protecting that interest. But electricity markets can never resemble the idealized markets of economic theory that have become so popular in conservative policy discourse. This chapter explores why that is. More specifically, it (i) reviews the work of economic thinkers whose work shapes the conservative challenge to regulation and the push for further deregulation, (ii) explores why the economist’s goal of allocative efficiency does not subsume elements of fairness and risk management that are important to voters and policymakers and why economic models continue to have trouble incorporating important lessons from behavioral research, and (iii) explains why these lessons are important to understanding the operation of electricity markets and to an understanding of the problem of ensuring a reliable, reasonably priced energy supply.