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Microeconomics Extra Credit Assignment Two

"We are the most advanced country in the world with a Thirld World electrical distribution system." --Bill Richardson--


Bill Richardson's statment refers to the fact that the United States' Electric Power Industry is regulated and that the distribution system is poor due to the fact that regulation fails to provide consistent service; also if a there is a power outage, then the restoration of that power is not done quickly. The distribution system was shown to be poor during the blackout that occurred on August 14,2003.

Regulation sets rules to influence economy. It determines prices, products, and types, and the conditions under which new firms enter an industry. The current regulation of the electric power industry is due to the large number of buyers that exist in the country. Every household in the United States uses electricity. The blackout that occurred on August 14th was due to the large usage of electricity resulting from air conditioning, computers, etc. in New York that day. Regulation was created mainly due the fear of the natural monopoly concept. A natural monopoly is a firm that can supply the entire market at a lower price than two or more firms can. Regulations were meant to prevent that from happening.

Reasons for Deregulation

1. The cost of regulation will be reduced.

In a regulated electric power industry, the majority of capital used by the government and the firm would be devoted to determining a fair price and the amount that would be returned for that price. In a deregulated industry, the private investor generating plants would incur the same costs and profits as another competitor.

2.The quality of service would improve.

Consumers of electricity in the electric power industry usually have no power over the quality of service. An electricity provider, Company X, only incurs a loss of revenure during a blackout. A voltage reduction (brownout) causes no penalty to Company X. In a deregulated industry, Company X would have to buy power from power plants. Since the deregulated company X incurs a loss from blackouts and brownouts, then to minimize the cost, better maintenance of their units would be in order. Better service to the consumer would be a result of better maintenenance.

Reasons against Deregulation

1. New entries into the deregulated industry are subsidized.

The government encourages competition in an industry. New firms are given money, or subsidies to help them get started. The price goes up as new entries enter an industry. New entries into a deregulated industry causes consumers to pay more.

2. Price Caps end up hurting the consumer.

Price caps are supposed to lessen the market power of certain firms, but they end up charging more money to the consumer. Price caps cause producers to increase investments in other markets for the short run, so then they end up reducing investments in the long run. A competitive market would not do that when left unregulated. The consumers have to pay a higher rate.

3. They may not be able to provide a high quality of service.

Since the individual firms are not regulated, then the reliablilty of that firm is low since it has no quota to meet. Even though the firm may incur losses, the firm's reliability on providing electricity and the services that go with it may not be dependable.

How to improve deregulation

In my opinion, the electric power industry should behave deregulated but with government influence. At the same time, antitrust laws that prevent the occurrence of a monopoly should be enacted. Also laws requiring firms to place levels on quality of service. A compromise between a regulated and deregulated industry should occur.