Re: Paul D. on this year's Nobel--especially V. Smith

[Sven R Larson <slarson@xxxxxxxxxxxx>]

"William B. Ryan" wrote:
> [Ryan]  This has nothing to do with uncertainty.

It definitely has to do with uncertainty. Every market is
fundamentally an institution for uncertainty management. It helps you
predict what product is going to be delivered where when and at what
price. When taken away the market institutions leave all economic
agents, not just consumers, completely uncertain as to how they will
be able to satisfy their needs tomorrow. When fundamentally changed,
the market institutions alter the premises upon which we rely on the
market for uncertainty management. Regulation is one way of solving
the uncertainty management problem, a free market another. Free
markets normally converge towards sticky prices or semi-sticky prices
precisely because it helps consumers and producers predict future cash
flows (costs and revenues). This is also why hedge instruments were
invented. In California complete deregulation was thwarted by, e.g.,
intervention by the FERC but also by incomplete moves by California
legislators. I'm not opposed to preserving regulation, but I do think
it is important to look at the deregulation alternative without
ideological bias.

> Electric power is a natural monopoly, an old concept that should be revived by
> economists.

This is only partly true. New technology has downscaled production
facilities and reduced the fixed cost obstacle to new entries. This
technology development is likely to proceed, and thereby improve the
case for competition. There are still big fixed investments and
therefore costs needed, in particular on the grid side of the
electricity market, but with more small-scale technology electricity
production and consumption can to a larger extent become a local
matter than it is today.

--
Dr. Sven R Larson
Department of Economics
Skidmore College
815, North Broadway
Saratoga Springs, NY 12866
(518) 580-5278