Second‐best pricing for incomplete market segments: Application to electricity pricing

Abstract

Due to technological, political, or practical considerations, most price mechanisms are not fully differentiated by time, location, and contingency of delivery. Rate or tax designers then face a trade‐off between the costs and benefits of using more complex price schedules. This paper studies the second‐best problem of designing, for a given market segment, a linear pricing schedule with a limited number of distinct prices while facing exogenous constraints within a large and practically relevant family. Interestingly, we find that second‐best prices may be computed using simple machine learning techniques. As an illustration, we apply our framework to retail electricity pricing in California.

Water allocation, crop choice, and priority services

“…which is positive under (1). This shows that the function B(kx; x) is supermodular in (k; x), and this implies that the solution to problem ( 12) is increasing with k. Therefore, (4) has a unique solution in X, as announced in the text.…”

“…These considerations have led various countries to examine reforms of water allocation systems in order to make them more robust to uncertain supplies. 1 Indeed, irrigation is often managed thanks to coarse regulatory instruments such as rationing. These instruments are economically ine¢ cient, as they do not allocate water supply to the most productive users.…”