Enery Economics

Natural gas consumption and production

Most natural gas is consumed in the US is domestically produced. Britain and the Netherlands are some if the large producers

Natural gas conversion and reserves

Most of the reserves are in Russia and the middle east.

Transaction cost economics

Comes from the behavior of agents: understood as alternative modes of organizing transactions (governance structures – such as markets, hybrids, firms, and bureaus) that minimize transaction costs

natural gas markets

residential gas markets:

short term elasticities of supply and demand are low, prices respond to stocks and ambient temperatures

Cournot Duopoly

A market structure with two firms that compete by setting their quantities simultaneously. Each firm assumes its competitor's output remains constant. The firms determine their optimal quantities by considering the market demand and their own costs.

Duopoly vs Competitive Market

Market structure with two dominant firms is called duopoly. It differs from a competitive market where multiple firms compete. In duopoly, firms have more control over prices and can collude. In a competitive market, firms have less control and prices are determined by market forces.

Monopoly vs Competitive Market and Duopoly

Monopoly: A market structure with only one seller, controlling the supply and price of a product or service. Results in limited competition and potential for higher prices.

Competitive Market: A market structure with many buyers and sellers, allowing for free competition and price determination based on supply and demand.

Duopoly: A market structure with only two sellers, controlling the majority of the market. Can lead to limited competition and potentially higher prices compared to a competitive market.

Bertrand Model

A pricing model in economics where firms compete by setting prices, assuming that they have identical products and customers will choose the lowest price. This leads to a competitive market with price undercutting.

countries set prices instead of output

Limit Pricing Model

Dominant firm maximizes its profits by chosing a price that is low enough to discourage some but perhaps not all entrants into the market. If the entry price of each prospective firm is clearly defined then the theory of limit pricing is simple

aka: strategy that can be used to deter entry of a firm into a market

Pollution as negative externality

Negative externality: A cost imposed on society due to the actions of individuals or firms, without compensation. Pollution is a prime example of a negative externality, as it harms the environment and public health. It occurs when pollutants are released into the air, water, or soil, causing damage that is not accounted for in market transactions.

Optimal level of pollution

The level of pollution that maximizes societal welfare by balancing economic growth and environmental protection. It considers the costs and benefits of pollution reduction and aims to find the point where the marginal benefits of reducing pollution equal the marginal costs.

Regional differences in optimal pollution levels

Variances in the most suitable pollution levels across different geographical areas, based on factors such as climate, population density, and industrial activities. These differences acknowledge the varying environmental capacities and socio-economic considerations of regions, aiming to minimize negative impacts on ecosystems and human health.

Sources of Market Failure

Factors that cause markets to fail in allocating resources efficiently, resulting in inefficiencies or inequities. Examples include externalities, imperfect competition, information asymmetry, public goods, and income inequality.

Characterisitics of public goods and bads

Characteristics of public goods and bads:

1. Non-excludability: Individuals cannot be excluded from consuming or benefiting from the good or bad.

2. Non-rivalry: Consumption by one person does not reduce the availability or benefit to others.

3. Collective demand: Public goods and bads are desired collectively by society.

4. Externalities: They can generate positive or negative effects on individuals or the environment.

5. Government intervention: Due to the free-rider problem, public goods and bads often require government provision or regulation.

free rider problem

stems primarily from non-excludability - person who does not pay for something stills gets to consume it

Policy instruments for correcting market failure

Regulation/standards (command and control): is the original approach and can be rigid and inefficient

tax/subsidies (effluent/emission fees): incentive based and “price approach”

emission permits (property rights): incentive based and quantity approach

Coase Theorem and assignment of property rights

CT: externalities can be eliminated if property rights can be assigned and are allowed to be traded, regardless of how the rights are distributed (assuming no significant income effects or transactions costs)

public goods

goods that benefit many consumers but are undersupplied by the market

Abate policies

Any intervention in a market designed to reduce production and/or consumption that creates environmental damages such as pollution

cost of energy conversion

The amount of money required to convert one form of energy into another. It includes expenses for equipment, fuel, maintenance, and labor.

efficient provision of public goods and bads

Pareto Optimal provision of a public good G*: MRS(G*) = MRT(G*)

aggregate supply and demand or rival & non-rival goods

For rival goods the aggregate demand is generated by horizontal summation of individual demand curves (for a given price sum the individual quantities demanded)

For non-rival goods need to determine the total MWTP by the consumers

pricing public goods and bads

Based off a utility function: U(w-g, G+g)

When G (provision of the public good by everyone else) is fixed, the best choice of g (individuals provision of the public good) will be the tangency point of an indifference curve and a horizontal line corresponding to G. Forms best response line. Intersection of the line with the “best response line” will determine the amount of g and G produced in this economy.

Samuelson Condition

At the Pareto Optimum G*, the total marginal benefit to the consumers is equal to the marginal cost of production

crude oil refining and gasoline blending

Process of converting crude oil into various products through refining. Refining involves heating, distillation, and chemical reactions to separate crude oil into different components like gasoline, diesel, and jet fuel. Gasoline blending is the process of mixing different components to create the desired properties and octane rating for gasoline.

linear programming to optimize refinery profits

Mathematical technique to maximize or minimize an objective function, subject to constraints, in order to optimize refinery profits.

aims to optimze (maximize or minimize) a linear objective function, subject to a number of linear constraints (components include: objective function, decision variables, contraints)

energy transportation

The process of moving energy from one place to another. It involves the transmission and distribution of electricity, oil, natural gas, and other forms of energy through various infrastructure such as power lines, pipelines, and tankers.

hotelling rule

Under monopoly the oil prices rise according to the hotelling rule adjusted by y(Rt)/y(Rt) otherwise known as Y(Rt) = 1 + 1/E(Rt)

backstop technology

As a heavily used limited resource becomes expensive, alternative resources will become cheap by comparison

Therefore, alternatives become economically viable options. 

In the long term, the theory implies that technological progress will allow backstop resources to become essentially unlimited.

new technology producing a close substitute to an exhaustible resource by using relatively abundant production inputs and rendering the reserves of the exhaustible resource obsolete when the average cost of production of the close substitute falls below the spot price of the exhaustible resource.