Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency
American Economic Journal: Economic Policy
vol. 14,
no. 4, November 2022
(pp. 80-110)
Abstract
Economists favor pricing pollution in part so that consumers face the full social marginal cost (SMC) of goods and services. But even absent externalities, retail electricity prices typically exceed private marginal cost, due to a utility's need to cover average costs. Furthermore, the SMC of electricity can fluctuate widely hour-to-hour, while retail prices do not. We show that residential electricity rates exceed average SMC in most of the US, but there is large geographic and temporal variation. This finding has important implications for pass-through of pollution costs, as well as for policies promoting dynamic pricing, alternative energy, and reduced electricity consumption.Citation
Borenstein, Severin, and James B. Bushnell. 2022. "Do Two Electricity Pricing Wrongs Make a Right? Cost Recovery, Externalities, and Efficiency." American Economic Journal: Economic Policy, 14 (4): 80-110. DOI: 10.1257/pol.20190758Additional Materials
JEL Classification
- D62 Externalities
- L94 Electric Utilities
- L98 Industry Studies: Utilities and Transportation: Government Policy
- Q42 Alternative Energy Sources
- Q53 Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
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