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Economics Working Papers, 2000

Copies may be downloaded on pdf, or hard copies may be requested from Joshua Hall, Working Paper Coordinator.


Forecasting Market Prices of Electric Power After Deregulation in the U.S.: Method and Application.

Abstract: The model developed in this paper provides forecast of regional equilibrium prices of electric power after the transition to retail competition. The interaction among electric utilities is assumed to be bounded by the present NERC regions within the U.S. The results of the Cournot model are contrasted with Bertrand solution and the regulated prices. It is found that Bertrand (competitive) prices are lower than average cost prices, but oligopoly prices are considerably higher. Predicted market power varies substantially among NERC regions, due primarily to differences in average costs of producers. Industry concentration has a lesser effect on prices because of contestability.


"Reducing and Solving a Riccati Equation of Optimal Control."

Note: Superceded by working paper 2001 01-01

00 - 03: SOBEL, RUSSELL S.

Public Health and the Placebo: The Legacy of the 1906 Pure Food and Drugs Act.

Abstract: This paper examines the 1906 Pure Food and Drugs Act and its legacy in modern pharmaceutical legislation. The 1906 Act was one of the first attempts of the federal government to regulate an entire industry in the name of consumer protection. The debate surrounding the act helped to strengthen interest group politics at a critical era of government expansion. Finally, this paper shows how the FDA definition of effectiveness as effective beyond a placebo negatively impacts public health by denying consumers the benefit of a proven placebo treatment even when it is the only, or the safest, treatment available.

00 - 04: BANDYOPADHYAY, SUBHAYU, Eun-Soo Park and Howard Wall.

Endogenous Export Subsidies and Welfare Under Domestic Cost Heterogeneity."

Abstract: We present a model of Cournot rivalry where domestic and foreign firms compete in a third-country market, and where the domestic export subsidy is determined by lobbying. Greater domestic cost heterogeneity (a mean-preserving spread of the marginal costs of the domestic firms) means that the subsidy level, aggregate domestic output, and domestic market share will all be higher. However, the effect of heterogeneity on domestic welfare is ambiguous. From a near-symmetric initial situation, greater domestic cost-heterogeneity reduces domestic welfare if the number of domestic firms exceeds some critical value. However, when starting further from symmetry, greater heterogeneity may raise welfare. Our results are in contrast with the no-lobbying scenario, where market share is independent of increased heterogeneity, and welfare is monotonically increasing in it.


"Illegal Immigration and Preferential Trade Liberalization."

Note: Superceded by working paper 2001 01-02.

00 - 06: SOBEL, RUSSELL S. and Gary A. Wagner.

Expressive Voting and Government Redistribution.

Abstract: Models of expressive voting postulate that voters will 'consume' ideological or moral stances on issues by voting for them, even when they are against the voter's own narrow self interest, if the probability of being a decisive voter is low. When a voter is unlikely to sway the outcome of the vote, the odds that a voter will incur any real personal cost (a higher tax burden, for example) from his or her own expressive vote is small. We test and find support for a straightforward empirical implication of this model, that public sector welfare (transfer) payments should be directly related to the probability of being the decisive voter.


Did Electric Utilities Sell Their Power Plants Too Cheaply?

Abstract: This study presents an application of the theory of real options to the sales of power plants by the U.S. electric utilities. Observations of the divestiture transaction prices make it possible to infer expected future prices of electricity. It is found that under plausible assumptions up to 2/3 of the plants sold will bring at least a normal economic return on capital to their owners even if the future market for electricity is perfectly competitive. About one half of the plants will bring above-normal economic returns under the perfectly competitive regime. This indicates that most of the buyers have not paid higher-than-competitive prices for power plants. Some electric utilities selling the plants may have received less than the fair market value for their assets.

00 - 08: BANDYOPADHYAY, SUBHAYU and Baishali Majumdar.

Multilateral Transfers Under Export Taxation.

Abstract: From Bhagwati, Brecher and Hatta (1983) we know that under free trade multilateral transfers from a single donor to two recipients cannot immiserize the recipients if the transfers are proportional to the trade of the two recipient nations. Several primary product exporting developing nations restrict their exports through export taxation. These nations also receive aid from the developed nations either directly or indirectly through organizations like the World Bank. This paper explores the possibilities of recipient immiserization in the presence of export taxes in the recipient nations (while the donor nation has free trade). In the presence of exogenously given export taxes, unlike the free trade case, proportional transfers can be immiserizing. If export taxes are unilaterally optimal (Nash welfare maximizing taxes) then proportional transfers are unlikely to immiserize. Finally, we explore the case of equal transfers and find that the nation imposing the higher optimal export tax rate is more likely to be immiserized.

00 - 09: BANDYOPADHYAY, SUBHAYU , and Sudeshna C. Bandyopadhyay.

Welfare in a Unionized Bertrand Duopoly.

Abstract: This paper presents a model of unionized oligopoly under Bertrand competition to investigate the effects of unionization parameters on domestic welfare. We find that the magnitude of the effect of foreign subsidization on the domestic wage (i.e., the "wage effect") is critical in determining the direction of the domestic welfare effect. If a unionization parameter raises the absolute value of the wage effect then domestic welfare is positively associated with that unionization parameter. We apply our findings to the case of profit sharing and find that while profit sharing raises domestic welfare under free trade, it paradoxically reduces welfare in a policy equilibrium.