ABSTRACT
This chapter focuses on static efficiency in energy markets, using the familiar tools of supply and demand. Static efficiency is the appropriate measure of efficiency when time considerations do not play a significant role. In static decision-making, today's decision can be made independently of future decisions. Economists make use of Occam's razor to choose the simpler explanation if both explanations are equally good. In 1932, Pigou proposed a tax to achieve the socially efficient solution. In 1960, Ronald Coase challenged the Pigou solution. Social welfare measures net gain to society, where net gain is the difference between total benefits and total costs. Market failure refers to situations where the market outcome is not socially efficient, although some use the term more broadly to include inequity. Private efficiency focuses mainly on consumers and producers, while social efficiency takes into account all parties, including government and taxpayers. Social welfare also incorporates equity assumptions.
