Efficiency in Deregulated Electricity Markets: Offer Cost Minimization vs. Payment Cost Minimization Auction

A payment cost minimization (PCM) auction has been proposed to solve the problem of inflated wholesale electricity prices. In the electricity industry, where even small changes in $/MW are worth tens of millions of dollars, it is highly important that policy makers have a good understanding of the tradeoffs and impacts of new institutional rules. In this paper we examine efficiency performance of the proposed PCM auction in contrast with the offer cost minimization (OCM) auction currently used by most independent system operators (ISOs) in the United States. For most of the analysis we concentrate on production efficiency, which is attained when a product is supplied to the market by the suppliers that have the smallest average total cost (ATC). An electricity market is efficient if there is no generator that could produce electricity cheaper than the chosen generators do. Production efficiency is desired because 1) it guarantees that market output is produced using the least-cost combination of inputs, thus resources are not wasted, 2) it also rewards the low-cost suppliers and provides the incentives to search for production techniques with even lower costs. [excerpt

The death of cost-minimization analysis?

Four different types of evaluation methods, cost-benefit analysis (CBA), cost-utility analysis (CUA), cost-effectiveness analysis (CEA) and cost-minimization analysis (CMA), are usually distinguished. In this note, we pronounce the (near) death of CMA by showing the rare circumstances under which CMA is an appropriate method of analysis. We argue that it is inappropriate for separate and sequential hypothesis tests on differences in effects and costs to determine whether incremental cost-effectiveness (or cost-utility) should be estimated. We further argue that the analytic focus should be on the estimation of the joint density of cost and effect differences, the quantification of uncertainty surrounding the incremental cost-effectiveness ratio and the presentation of such data as cost-effectiveness acceptability curves. Two examples from recently published CEA are employed to illustrate the issues. The first shows a situation where analysts might be tempted (inappropriately) to employ CMA rather than CEA. The second illustrates one of the rare circumstances in which CMA may be justified as a legitimate form of analysis

Cost Minimization Model of Gas Transmission Line for Indonesian SIJ Pipeline Network

Optimization of Indonesian SIJ gas pipeline network is being discussed here. Optimum pipe diameters together with the corresponding pressure distribution are obtained from minimization of total cost function consisting of investment and operating costs and subjects to some physical (Panhandle A and Panhandle B equations) constraints. Iteration technique based on Generalized Steepest-Descent and fourth order Runge-Kutta method are used here. The resulting diameters from this continuous optimization are then rounded to the closest available discrete sizes. We have also calculated toll fee along each segment and safety factor of the network by determining the pipe wall thickness, using ANSI B31.8 standard. Sensitivity analysis of toll fee for variation of flow rates is shown here. The result will gives the diameter and compressor size and compressor location that feasible to use for the SIJ pipeline project. The Result also indicates that the east route cost relatively less expensive than the west cost

Cost Minimization of a Competitive Firm

One of the economists’ missions is to predict the behavioral responses of consumers or firms on the assumption that optimizing continues. Once this capability is developed, economists try to manage “today” to optimize future economic return of the inputs. Techniques to predict future performance vary from an educated guess based on an appropriate analogy to very complex analytical and numerical calculations and approximations. However, what they all have in common is that they analyze performance in past to say something to obtain constrained optimal output in future. Considering Lagrange multiplier technique applied to a firm’s cost minimization problem subject to production function as an output constraint, an attempt has been made in this paper to apply necessary and sufficient conditions for optimal values. We gave interpretation of Lagrange multiplier and showed that its value is positive. Examining the behavior of the firm; that is, if the cost of a particular input increases, the firm needs to consider decreasing level of that particular input; at the same time, there is no effect on the level of other inputs; also that when the demand of product increases, the firm should consider increasing its level of inputs: capital, labour and other inputs, have been derived.Lagrange Multiplier, Optimization, Cost Minimization, Cobb-Douglas Production Function.

Restoration Ecology: Two-Sex Dynamics and Cost Minimization

We model a spatially detailed, two-sex population dynamics, to study the cost of ecological restoration. We assume that cost is proportional to the number of individuals introduced into a large habitat. We treat dispersal as homogeneous diffusion. The local population dynamics depends on sex ratio at birth, and allows mortality rates to differ between sexes. Furthermore, local density dependence induces a strong Allee effect, implying that the initial population must be sufficiently large to avert rapid extinction. We address three different initial spatial distributions for the introduced individuals; for each we minimize the associated cost, constrained by the requirement that the species must be restored throughout the habitat. First, we consider spatially inhomogeneous, unstable stationary solutions of the model's equations as plausible candidates for small restoration cost. Second, we use numerical simulations to find the smallest cluster size, enclosing a spatially homogeneous population density, that minimizes the cost of assured restoration. Finally, by employing simulated annealing, we minimize restoration cost among all possible initial spatial distributions of females and males. For biased sex ratios, or for a significant between-sex difference in mortality, we find that sex-specific spatial distributions minimize the cost. But as long as the sex ratio maximizes the local equilibrium density for given mortality rates, a common homogeneous distribution for both sexes that spans a critical distance yields a similarly low cost

NONPARAMETRIC ANALYSIS OF COST MINIMIZATION AND EFFICIENCY

This study examines cost minimizing behavior and efficiency measures for a sample of Kansas wheat producers, using nonparametric methods. As such, it verifies the applicability of nonparametrics within a production economic framework.nonparametrics, WACM, production, Industrial Organization, Productivity Analysis, Research Methods/ Statistical Methods,

Strong core equivalence theorem in an atomless economy with indivisible commodities

We consider an atomless exchange economy with indivisible commodities. Every commodity can be consumed only in integer amounts. In such an economy, because of the indivisibility, the preference maximization does not imply the cost minimization. We prove that the strong core coincides with the set of cost-minimized Walras allocations which satisfy both the preference maximization and the cost minimization under the same price vector.indivisible commodities, core equivalence, strong core, cost-minimized Walras equilibrium