Edited by Joanne Evans and Lester C. Hunt
Chapter 33: Current Issues in the Design of Energy Policy
Often energy policy is treated in a partial equilibrium framework concentrating on particular fuels; however, there is also a strong tradition of treating the energy sector as part of a general equilibrium model. In this chapter we address two fundamental yet related areas of concern: the cost–benefit analysis of social discount rates and the nature of integrated assessment models (IA models) which embed the energy sector in a macroeconomic growth model. The issues that arise in the economics of energy policy are considered. The basis for an energy policy is the attempt to correct market failures, which can occur in three principal forms: asymmetric information, market power and externality. Normative economic policy towards asymmetric information issues is treated separately in Chapter 21 on regulation, and the emphasis in this chapter is on the positive economics of market power and externality. 2 Energy Market Policy Helm (1991) discusses various categories of market failure as the basis of energy policy. In general, any form of microeconomic policy implies government intervention to distort the private market outcome for resource allocation. A very general, and politically orientated, basis for policy is to redistribute income by altering the structure of prices set by private markets. Economists tend to ignore this basis for policy as being outside their special expertise. Instead they focus on efficiency reasons for distorting market outcomes, by identifying market failures as: monopoly; efficient pricing with asymmetric information; security of supply and risk; and...
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