Global Sourcing under Uncertainty

This paper develops a general equilibrium model of international trade in homogenous intermediate inputs. In the model, trade between countries is driven exclusively by uncertainty in the delivery of inputs. Because their managers are risk-averse, final good firms contract with multiple suppliers located in different countries in an attempt to decrease the variability of their profits. The analysis shows that risk diversification provides an incentive for international trade over and above such reasons as comparative advantages (emphasized in classical models of international trade) and economies of scale (emphasized in new trade models), and highlights a new channel – a reduction in uncertainty – through which trade liberalization increases welfare

Competitive interstate taxation of western coal

This paper analyzes the potential market power of western states in setting coal severance taxes. An attempt to determine the emphasis placed by the western states on the development of their coal resources is also made. Three market structures are analyzed. One involves a western regional cartel, setting taxes collectively. The other cases are noncooperative tax equilibria with Montana and Wyoming competing against each other. We study the effects on these equilibria of changes in each region's relative emphasis on development of coal resources vs tax revenue. The welfare impacts of these tax setting policies are also addressed. The analysis is based on an activity analysis of US coal markets. The results show that the taxes associated with the noncooperative competitive tax equilibria are close to present tax levels. Additionally, we conclude that western states currently are quite efficient extractors of economic rent from coal produced within their boundaries, in terms of welfare loss per dollar of tax revenue collected. 2 figures

Upstream vs. Downstream CO2 Trading: A Comparison for the Electricity Context

In electricity, “downstream” CO2 regulation requires retail suppliers to buy energy from a mix of sources so that their weighted emissions satisfy a standard. It has been argued that such “load-based” regulation would solve emissions leakage, cost consumers less, and provide more incentive for energy efficiency than traditional source-based cap-andtrade programs. Because pure load-based trading complicates spot power markets, variants (GEAC and CO2RC) that separate emissions attributes from energy have been proposed. When all energy producers and consumers come under such a system, these load-based programs are equivalent to source-based trading in which emissions allowances are allocated by various rules, and have no necessary cost advantage. The GEAC and CO2RC systems are equivalent to giving allowances free to generators, and requiring consumers either to subsidize generation or buy back excess allowances, respectively. As avoided energy costs under source-based and pure load-based trading are equal, the latter provides no additional incentive for energy efficiency. The speculative benefits of load-based systems are unjustified in light of their additional administrative complexity and cost, the threat that they pose to the competitiveness and efficiency of electricity spot markets, and the complications that would arise when transition to a federal cap-and-trade system occurs.Emissions trading, greenhouse gas regulation, electricity market models

How good are supply function equilibrium models: an empirical analysis of the ERCOT balancing market

We present an empirical analysis of a supply function equilibrium model in the Texas spot electricity market. We derive conditions for optimal bidding behavior in a spot market with ex ante bilaterally contracted sales. By estimating costs, we are able to derive a set of ex post-and ex ante-optimal supply functions and use a non-parametric behavioral model to compare our theoretically optimal supply functions to actual offers made. Our results show that with the exception of the largest generators, firms make offers with markups and markdowns far in excess of what a model of profit-maximizing behavior suggests. Copyright Springer Science+Business Media, LLC 2007Electricity markets, Supply function equilibrium, ERCOT, Market power,