Bart McGuire
In a lossy electric power grid complex interactions exist among the decisions of power producers, power consumers, and the operator of the transmission grid. Must coordination be carriers out centrally, or can some for of decentralization achieve an equally good result? In particular, can price-quantity dialogues between producers and consumers on the one hand and power grid managers on the other provide sufficient dissemination of information to achieve an economically efficient outcome? We examine this question in the context of a simple DC lossy system with rather simply characterized producers and consumers. An effective iterative price-quantity adjustment process is proposed and demonstrated in a simulation model. Decision interactions (i.e., externalities) are carefully specified and internalized in the economist’s traditional way by imposition of transmission tolls. Emphasis is placed on the use of prices to drive — not merely reflect — socially good decisions.