black_000016714600XSmall

Getting More Power

Jul 8, 2012 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Financial Markets, Regulation, Thinking Economically, Uncategorized • 178 Views    No Comments

After Hurricane Irene last August, I lost my electricity for 8 days. Then, only weeks later, after a surprise snow storm, all over again, 8 days without power.  Facing a similar plight last week, economist Arnold Kling asked why the lights were out for so long.

His answer? Reliability has no price.

Problem #1: Dr. Kling’s Washington D.C. provider (mine is in NJ), Pepco, is a regulated monopoly. Where then, he asks, is the incentive to improve service? With no competition, unless things get pretty bad, they have the business.

Problem #2: Reliability has no price. As King says, “…when there is no market price for something of value, incentives are bound to be misaligned.” By contrast, Pepco’s preparation for the unknown that might never happen can have a steep price.

Kling suggests reliability insurance. Any customer who wants a guarantee that her power will not be out for longer than 4 hours has a higher monthly bill. And, if the power company does not comply, then it owes the customer a certain amount, like $20 an hour after the fourth blackout hour.

Whether Dr. Kling has a workable solution, I am not sure. However, he has pointed out how crucial prices are. As sources of incentive and information, they shape business and consumer decisions.

Don’t prices give us more power?

A final thought: Remember the pre-breakup, before 1984, AT&T? A regulated monopoly, they were reliable. So too was the Eastern Airlines NY to Washington D.C. shuttle. Was it only the guaranteed profit margins that distinguishes them from “deregulated” electricity markets?

I read about Arnold Kling’s power outage and his response here after seeing a link on marginal revolution.com. In Econ 101 1/2 you can read about the original AT&T and the breakup (pp. 254-264).

Related Posts

« »