green price indices abstract this paper suggests two theoretically consistent and empirically tractable ways that a cost of living index can be expanded to include the environment and other public goods in addition it presents an empirical illustration of such an index for los angeles california incorporating air quality and other spatially varying public goods using a hedonic model the results indicate that the required information can be recovered and that including public goods can make a substantial difference in the index

the costs of electricity interruptions in spain are we sending the right signals one of the objectives of energy security is the uninterrupted physical availability of energy however there is limited information about how much is the cost of energy supply interruptions this information is essential to optimize investment and operating decisions to prevent energy shortages or alternatively to determine the strength of the signals to be sent to the agents so that they may invest accordingly in this paper we estimate the economic impact of an electricity interruption in different sectors and regions of spain although there are several caveats in our analysis we find that in 2008 the cost for the spanish economy of one kwh of electricity not supplied was above 4 even in a conservative scenario which is higher than the signals currently being sent as incentives to avoid these interruptions this might result in an underinvestment in short term energy security particularly when we add the usual risk aversion of most consumers

a dynamic analysis of a demand curve based capacity market proposal the pjm reliability pricing model because of high generation adequacy standards in the power industry some peaking capacity operates for a limited time during the year and may not receive sufficient energy revenues to meet its fixed costs this is particularly true when energy prices are capped in order to mitigate market power the northeastern u s independent system operators isos have responded to this issue by establishing capacity obligations for loads and markets for installed capacity thus providing a capacity revenue stream to generators the installed capacity icap markets in the northeastern u s markets are a response to this need for additional incentives to construct generation the federal energy regulatory commission ferc has accepted the pjm interconnection s pjm proposal to replace the present fixed icap requirement that is placed upon load serving entities lses with a demand curve based system in which the iso would be responsible for acquiring residual capacity on behalf of lses the demand curve approach pays more when reserve margins are smaller and provides a reduced incentive for investment when installed reserves are above the target another goal is to make revenues more predictable for generators making investment less costly and ultimately lowering prices for consumers a dynamic representative agent model is presented for projecting effects upon reserve margins generator profitability and consumer costs and is applied to alternative demand curves proposed for the pjm market the consumer costs resulting from a sloped demand curve are robustly lower compared to the present fixed requirement under a wide range of assumptions concerning behavior of generation owners including risk attitudes bidding behavior and willingness to build capacity as a function of forecast profit the cost savings arise from lower capital costs to generators due to reduced risk and risk premiums also average installed capacity is less for the same level of reliability because of reduced fluctuations in installed reserves

does commercialization undermine the benefits of decentralization for local services provision evidence from mexico s urban water and sanitation sector summary decentralization has been promoted as a means to better reflect citizen preferences and improve local services many developing countries decentralized and promoted neoliberal policies such as commercialization simultaneously leaving mayors with the responsibility of improving public services through self financing reforms this study evaluates experiences in three mexican cities to assess whether decentralization and commercialization practices have resulted in improved water and sanitation services it finds that commercialization has increased social conflict surrounding urban services provision and that local institutional constraints further undermine mayor s ability to adopt politically contentious policies the result has been stalled and uneven service improvements

winds of change how high wind penetrations will affect investment incentives in the gb electricity sector abstract wind power is widely expected to expand rapidly in britain over the next decade large amounts of variable wind power on the system will increase market risks with prices more volatile and load factors for conventional thermal plant lower and more uncertain this extra market risk may discourage investment in generation capacity financial viability for thermal plant will be increasingly dependent on price spikes during periods of low wind increased price risk will also make investment in other forms of low carbon generation e g nuclear power more challenging a number of policies can reduce the extent to which generators are exposed to market risks and encourage investment however market risks play a fundamental role in shaping efficient investment and dispatch patterns in a liberalised market therefore measures to improve price signals and market functioning such as a stronger carbon price and developing more responsive demand are desirable however the scale of the investment challenge and increased risk mean targeted measures to reduce although not eliminate risk exposure such as capacity mechanisms and fixed price schemes may have increasing merit the challenge for policy is to strike the right balance between market and planned approaches

a proposal for social pricing of water supply in cote d ivoire we consider the design of a nonlinear social tariff for residential water in cote d ivoire which is a case of a monopolistic private operator supplying a population of heterogeneous consumers the proposed optimal tariff includes an initial social block with a low unit price and higher consumption blocks with a monopoly pricing rule this optimal nonlinear tariff is calibrated using econometric estimates of a panel data residential water demand equation welfare changes associated with moving from the actual tariff to approximations of the optimal pricing system are computed under different tariff scenarios we find that gains in consumer welfare would outweigh losses in producer surplus in a majority of ivorian local communities

dynamic modeling of thermal generation capacity investment application to markets with high wind penetration modeling the dynamics of merchant generation investment in market environments can inform the making of policies whose goals are to promote investment in renewable generation while maintaining security of supply such models need to calculate expected output costs and revenue of thermal generation subject to varying load and random generator outages in a power system with high penetrations of wind this paper presents a dynamic investment simulation model where the short term energy market is simulated using probabilistic production costing using the mix of normals distribution mond technique to represent residual load load net of wind output price mark ups due to market power are accounted for an energy only market setting is used to estimate the economic profitability of investments and forecast the evolution of security of supply simulated results for a great britain gb market case study show a pattern of increased relative security of supply risk during the 2020s in addition many new investments can recover their fixed costs only during years in which more frequent supply shortages push energy prices higher

the social cost of living index abstract household cost of living indexes reflect household preferences analogous indexes for groups of households require a corresponding concept of group preferences in this paper i investigate the social cost of living index a group index based on the bergson samuelson social welfare function i first define the index and examine its properties under the assumption that the investigator constructing it expresses his distributional judgments in an explicit bergson samuelson social welfare function i then examine the maximizing society and the independent society two cases in which the index can be constructed from the information contained in the market demand functions in these two cases a laspeyres index i e the fixed weight index based on the reference consumption pattern is an upper bound on the exact social cost of living index in general however the assumptions required to place bounds on the social cost of living index are much more likely to be satisfied than those required to place analogous bounds on a household s cost of living index

ranking income distributions a large variety of policy questions involve choices between social states and a consequent ordering of the feasible alternatives when these social states are related to the levels of welfare experienced by individuals or households two central issues stand out in determining the relative desirability of different social outcomes one of these is the essentially positive exercise of achieving comparability between households with different characteristics such as composition or preferences operating in different environments for example facing different price structures the other concerns the normative judgments implicit in the evaluation of alternative allocations of resourcesthe emphasis placed on inequality between households and the extent to which greater inequality can be compensated by higher average living standards this paper focuses on the second of these issues and in doing so we abstract from the problem of household comparability by considering a population of n households identical in all respects except for their incomes the question of ordering social states then becomes one of ranking income distributions over a group of anonymous households or individuals borrowing the usual assumptions imposed on consumer preferences we may suppose that a social ordering of income distributions can be represented by a welfare function 2

quality change in price indexes price indexes provide the fundamental building blocks for measuring the general price level along with real incomes and real output but the most important single price index for the united states the cpi has been criticized as significantly underestimating the pace of quality change this paper sketches the issues involved in the measurement of quality change in price indexes it reviews the theory of quality change discusses how the bureau of labor statistics deals with quality change and provides examples of measurement issues in practice it concludes with a proposal to resolve the massive uncertainties in this area

consumer prices the consumer price index and the cost of living after presenting major findings and recommendations the cpi commission reiterates the estimate of a 1 1 percentage point per annum upward bias it rejects the contention that the bls already makes substantial corrections for quality change that quality improvements and new products accrue only to the rich and that procedures to make more extensive quality adjustments valuations of new products and adjustments for commodity and outlet substitution are impractical the bias in the cpi can be sharply reduced as the authors detail in this paper coauthors are ellen r dulberger robert j gordon zvi griliches and dale w jorgenson

generation capacity expansion in a risky environment a stochastic equilibrium analysis we cast models of the generation capacity expansion type formally developed for the monopoly regime into equilibrium models better adapted for a competitive environment we focus on some of the risks faced today by investors in generation capacity and thus pose the problem as a stochastic equilibrium model we illustrate the approach on the problem of the incentive to invest agents can be risk neutral or risk averse we model risk aversion through the cvar of plants profit the cvar induces risk adjusted probabilities according to which investors value their plants the model is formulated as a complementarity problem including the cvar valuation of investments an illustration is provided on a small problem that captures several features of today s electricity world a choice often restricted to coal and gas units a peaky load curve because of wind penetration uncertain fuel prices and an evolving carbon market we assess the potential of the approach by comparing energy only and capacity market organizations in this risky environment our results can be summarized as follows a deterministic analysis overlooks some changes of capacity structure induced by risk whether in the capacity market or energy only organizations the risk neutral analysis also misses a shift towards less capital intensive technologies that may result from risk aversion last risk aversion also increases the shortage of capacity compared to the risk neutral view in the energy only market when the price cap is low this may have a dramatic impact on the bill to the final consumer the approach relies on mathematical programming techniques and can be extended to full size problems the results are illustrative and may deserve more investigation

are medical prices declining evidence from heart attack treatments we address long standing problems in measuring medical inflation by estimating two types of price indices the first a service price index prices specific medical services as does the current cpi the second a cost of living index measures a quality adjusted cost of treating a health problem we apply these indices to heart attack treatment between 1983 and 1994 more frequent reweighting and accounting for price discounts lowers the measured price change for heart attacks by three percentage points annually accounting for quality change lowers it further we estimate that the real cost of living index fell about 1 percent annually

an estimate of the value of lost load for ireland this paper estimates the value of short term lost load in the all island electricity market which includes the republic of ireland and northern ireland the value of lost load voll is the average willingness of electricity consumers to pay to avoid an additional period without power voll is also known as the value of security of electricity supply and is inferred using a production function approach detailed electricity use data for the republic of ireland allows us to estimate the value of lost load by time of day time of week and type of user we find that the value of lost load is highest in the residential sector in both the republic of ireland and northern ireland our results can be used to advise policy decisions in the case of supply outages and to encourage optimum supply security in the context of this study short term is taken to be a matter of hours rather than days or weeks

renewables and climate change mitigation irreversible energy investment under uncertainty and portfolio effects abstract ongoing negotiations under the unfccc center around the possibilities for stabilization of greenhouse gases at a safe level new energy technologies are assumed to make major contributions to this goal however in the light of scientific uncertainty e g about climate sensitivity feedback effects etc market uncertainty e g fuel price volatility technological uncertainty e g availability of renewable technology socio economic uncertainty e g development of different macroeconomic factors and policy uncertainty e g about commitment to specific targets and stability of co2 prices it is difficult to assess the importance of different technologies in achieving robust long term climate risk mitigation one example currently debated in this context is biomass based energy which can be used to produce both carbon neutral electricity and at the same time offer the possibility of negative emissions by capturing carbon from biomass combustion at the conversion facility and permanently storing it in this study we analyze the impact of uncertainty on investment decision making at the plant level in a real options valuation framework and then use the ggi scenario database iiasa 2009 as a point of departure for deriving optimal technology portfolios across different socio economic scenarios for a range of stabilization targets focusing in particular on the new low emission targets using alternative risk measures

a review of balancing costs in italy before and after res introduction abstract the massive introduction of res in electricity markets is recognized to have induced a merit order effect on wholesale prices while day ahead prices are likely to decline as res e production increases the effects on balancing market sessions are more ambiguous taking into account the northern italian zone characterized by a high solar pv and hydro penetration we provide empirical evidence that balancing quantities decreased while costs increased between two samples associated with low 2006 08 and high 2013 15 res levels we estimate balancing costs for different technologies and compare their dynamics across specific hours we find evidence of increasing balancing prices in particular market conditions that we interpret as a signal of strategic use of real time sessions by conventional producers prone to the merit order effect in the day ahead market we compare our results to those obtained in the german market where on the contrary balancing costs have decreased and postulate that the different market designs may explain these results our findings suggest that the italian policy makers should carefully monitor all trading sessions especially those close to real time to avoid the exercise of market power by few operators allowed to guarantee system security and additionally to promptly adopt a capacity market

spatial cost of living indices and the distribution of public goods this paper develops cost of living col indices that vary across space while conventional indices adjust for differences in prices the col defined here also reflects access to public goods this analysis relies on the structure of a residential sorting model to estimate the col index for each of 226 metropolitan statistical areas msas in 1990 and 2000 in the united states empirical results show signifi cant differences in the col across the spatial landscape this paper focuses on the gini coefficient as a measure of inequality to demonstrate the distribution of public goods across the population

renewable energy investments under different support schemes a real options approach abstract this paper adopts a real options approach to analyze investment timing and capacity choice for renewable energy projects under different support schemes the main purpose is to examine investment behavior under the most extensively employed support schemes namely feed in tariffs and renewable energy certificate trading we consider both multiple sources of uncertainty under each support scheme and uncertainty with respect to any change of support scheme and we obtain both analytical when possible and numerical solutions in a nordic case study based on wind power we find that the feed in tariff encourages earlier investment nevertheless as investment has been undertaken renewable energy certificate trading creates incentives for larger projects in our baseline scenario and taking the fixed feed in tariff as a base the revenue required to trigger investments is 61 higher with renewable certificates at the same time investment capacity is 61 higher

economic consequences of a capacity market implementation the case of poland abstract this paper investigates the potential economic consequences of setting up a capacity market in poland a computable model of the polish power generation system is developed and employed to analyse the impact of this mechanism two scenarios are designed for this study i a reference scenario that reflects the energy only market and ii a capacity market scenario that assumes the implementation of such an instrument to assess the economic consequences the following parameters are estimated i annual electricity prices ii loss of load hours iii expected energy not served and only for the capacity market scenario iv market clearing price v total budget of the capacity market and vi increase in electricity price due to the introduction of the capacity market the findings of the study indicate that the long term maintenance of the energy only market results in higher electricity prices when compared to putting a capacity market into operation introducing a capacity market enables existing resources to be used effectively without excessive capital expenditure the methods and conclusions presented in this paper provide valuable findings and policy insights regarding the potential economic consequences of a capacity mechanism in a power system mostly dominated by coal and undergoing an energy transition

cross border electricity market effects due to price caps in an emission trading system an agent based approach the recent low co2 prices in the european union emission trading scheme eu ets have triggered a discussion whether the eu ets needs to be adjusted we study the effects of co2 price floors and a price ceiling on the dynamic investment pathway of two interlinked electricity markets loosely based on great britain which already has introduced a price floor and on central western europe using an agent based electricity market simulation with endogenous investment and a co2 market including banking we analyse the cross border effects of national policies as well as system wide policy options a common moderate co2 auction reserve price results in a more continuous decarbonisation pathway this reduces co2 price volatility and the occurrence of carbon shortage price periods as well as the average cost to consumers a price ceiling can shield consumers from extreme price shocks these price restrictions do not cause a large risk of an overall emissions overshoot in the long run a national price floor lowers the cost to consumers in the other zone the larger the zone with the price floor the stronger the effect price floors that are too high lead to inefficiencies in investment choices and to higher consumer costs

beyond the cpi an augmented cost of living index this note examines an augmented cost of living index acoli for the purpose of accounting for augmented consumption in real income measures well being includes not only conventional consumer purchases but also goods and services provided by employers by mandated social regulations and by tax financed public goods because augmented consumption is often provided in ways that raise prices but not market incomes deflating with conventional price indexes may understate real income growth an exploratory application of the acoli approach to the united states during the 1960 1997 period suggests that the consumer price index has grown about 19 faster than the acoli this correction would reduce the estimated cost of living increase by 47 per year over the last 37 years

water subsidy policies comparison of the chilean and colombian schemes analysis of two water subsidy schemes a means tested subsidy in chile and a geographically targeted subsidy in colombia shows that the means tested system is better able to identify poor households than the geographically targeted scheme however the overall distributive impact of both schemes is quite similar at least for the three lowest income deciles because the amount of benefits per household in the geographically targeted colombian scheme are differentiated by the socioeconomic classification of household despite the relative merits of the chilean means tested scheme targeting errors are still quite large more than 60 percent of subsidies accrue to households that are above the third decile of the income distribution if the policy objective in chile is to benefit a significant proportion of households in the lowest income deciles then either the targeting mechanism must be improved or the number of subsidies has to increase to take into account these targeting imperfections in colombia almost all households receive some kind of benefit implying an unnecessarily high fiscal cost an improvement in the targeting mechanism could lower this cost without jeopardizing benefits to lower income households some suggestions for additional research and for improving both schemes are discussed

rationality in psychology and economics the task i shall undertake here is to compare and contrast the concepts of rationality that are prevalent in psychology and economics respectively economics has almost uniformly treated human behavior as rational psychology on the other hand has always been concerned with both the irrational and the rational aspects of behavior in this paper irrationality will be mentioned only obliquely my concern is with rationality economics sometimes uses the term irrationality rather broadly e g becker 1962 and the term rationality correspondingly narrowly so as to exclude from the domain of the rational many phenomena that psychology would include in it for my purposes of comparison i will have to use the broader conception of psychology one point should be set immediately outside dispute everyone agrees that people have reasons for what they do they have motivations and they use reason well or badly to respond to these motivations and reach their goals even much or most of the behavior that is called abnormal involves the exercise of thought and reason freud was most insistent that there is method in madness that neuroses and psychoses were patients solutions not very satisfactory solutions in the long run for the problems that troubled them the assumption that actors maximize subjective expected utility economic rationality supplies only a small part of the premises in economic reasoning and that often not the essential part the remainder of the premises are auxiliary empirical assumptions about actors utilities beliefs expectations and the like making these assumptions correctly requires an empirically founded theory of choice that specifies what information decision makers use and how they actually process it this behavioral empirical base is largely lacking in contemporary economic analysis and supplying it is essential for enhancing the explanatory and predictive power of economics

assessing energy supply security outage costs in private households abstract the objective of this paper is to contribute to the topic of energy supply security by proposing a monte carlo based and a survey based model to analyze the costs of power interruptions outage cost estimations are particularly important when deciding on investments to improve supply security e g additional transmission lines in order to compare costs to benefits but also other policy decisions on measures that have direct or indirect consequences for the supply security e g a phasing out of nuclear energy need to be based on results from outage cost estimations the main focus of this paper lies with residential consumers but the model is applied to commercial industrial and governmental consumers as well there are limited studies that have approached the problem of evaluating outage cost when comparing the results of these studies they often display a high degree of diversification as consumers have different needs and dependencies towards the supply of electricity because of varying circumstances and preferences a great diversity in outage cost is a logical consequence to take the high degree of uncertainties into account a monte carlo simulation was conducted in this study for the case of private households in germany

an analysis of a forward capacity market with long term contracts we analyze the effectiveness of a forward capacity market fcm with long term contracts in an electricity market in the presence of a growing share of renewable energy an agent based model is used for this analysis capacity markets can compensate for the deteriorating incentive to invest in controllable power plants when the share of variable renewable energy sources grows but may create volatile prices themselves capacity markets with long term contracts have been developed e g in the uk to stabilize capacity prices in our analysis a fcm is effective in providing the required adequacy level and leads to lower cost to consumers and more stable capacity prices as compared to a yearly capacity market in case of a demand shock a fcm may develop an investment cycle but it still maintains security of supply its main effect on the power plant portfolio is more investment in peak plant

how to correct for long term externalities of large scale wind power development by a capacity mechanism this paper deals with the practical problems related to long term security of supply in electricity markets in the presence of large scale wind power development the success of recent renewable promotion schemes adds a new dimension to ensuring long term security of supply it necessitates designing second best policies to prevent large scale wind power development from distorting long run equilibrium prices and investments in conventional generation and in particular in peaking units we rely upon a long term simulation model which simulates electricity market players investment decisions in a market regime and incorporates large scale wind power development in the presence of either subsidized or market driven development scenarios we test the use of capacity mechanisms to compensate for long term effects of large scale wind power development on prices and reliability of supply the first finding is that capacity mechanisms can help to reduce the social cost of large scale wind power development in terms of decrease of loss of load probability the second finding is that in a market based wind power deployment without subsidy wind generators are penalised for insufficient contribution to the long term system s reliability