INSTRUCTOR DISCUSSION NOTES:
Deregulation Doesn't Make Electricity Market More Competitive

1. Draw a graph of a natural monopoly in SR equilibrium. Now allow competition to ensue. What should happen to the price? Why? Explain graphically.

Make sure that the students understand the notion of falling marginal cost over the relevant range. Get them to focus on the need to become more efficient.

2. What are the incentive effects of a "maximum bid" contract? Will cost be controlled? Why or why not?

Individual electric companies have no incentive to accurately estimate costs, and have every incentive to inflate costs to win the bid. The companies make no attempt to control costs.

3. Outline some of the non-competitive aspects of utilities, as identified in this article. How do those compare with, say, the competitive aspects of long-distance telephone service?

Answers may vary. Make sure the students focus on what makes the markets competitive, or non-competitive.

Multiple Choice/True False Questions

1. Under regulation, a utility would be allowed to earn a(n) --------- profit.

  1. economic
  2. normal
  3. opportunity
  4. negative
ANS . b

2. True/False. Utilities are considered "natural monopolies" because they can serve the market alone more efficiently and at a lower price than several firms.

ANS . True

3. Under deregulation, the market price of electricity should have , and the market quantity should have -------- .

  1. Increased; increased.
  2. Increased; decreased.
  3. Decreased; increased.
  4. Decreased; decreased.
ANS . c

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