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International Energy Markets

humans has been the process of learning how to use ever more of this energy to satisfy basic needs, along with space conditioning, transportation, and entertainment.

In chapter 2, we begin with the history of energy use and speculate upon future global energy production and consumption.

Economists often favor markets in a capitalist economy for allocating scarce resources. They feel that market discipline helps to create efficiencies and minimize costs. The lure of profits helps to attract capital to growing markets and away from those that are shrinking. Markets spur innovation and promote new products. With competition and decentralized decision-making, capitalist economies are more flexible and personal freedom is enhanced.

In chapter 3, we analyze energy markets past and future, focusing on competitive markets in a static framework with an application to the coal industry. Principles of demand and supply help us to understand how market prices are influenced. Demand and supply elasticities, which capture responsiveness to price, are developed and used to analyze market changes and price controls. In turn, elasticities can also be used to recreate demand and supply curves.

Energy resources are often publicly owned and considered basic wealth to a society. As such they are usually taxed—sometimes quite heavily. In chapter 3, we also consider energy taxes in the context of a static model. Who pays, or the incidence of the tax, depends on how responsive demanders and suppliers are to market price. Types of taxes and information on energy tax structure are presented.

Economists who favor markets and private ownership for the allocation of goods and services sometimes agree that markets fail and that room exists for the government to step in. One such case is a decreasing-cost industry in which the greater the production, the lower the unit costs, and the bigger the producer, the lower its average costs. Such industries are considered natural monopolies.

For many years, the electricity industry’s huge capital costs and economies of scale had marked it as a natural monopoly. In such an industry, we prefer one producer on the grounds of greater efficiency. However, one private producer when left to his own devices will be able to monopolize the industry and make monopoly profits. In chapter 4, we consider the electricity industry, summarize the various technologies for generating electricity, and discuss how government ownership or price regulation have been used to try to control monopoly profits.

Alleged problems with government ownership and regulation, along with technical changes in electricity generation, have led to the current moves toward deregulation and privatization, which are discussed in chapter 5. Classic deregulation examples in New Zealand, the United Kingdom, and Scandinavia are

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