Efficient Market Design and Public Goods, Part I: Economic Models

The theory used by economists to support restructuring of the electric power industry has ignored several important technological constraints and public goods that affect the way in which power is delivered. Similarly, engineers, by using security-constrained optimization to incorporate the demand for reliability, have failed to properly define the economic problem. In this two-part paper we attempt to remedy the deficiencies of both the economists’ approach and the security-constrained optimization approach through a collaboration of economists and engineers to examine the theoretical properties of a networked power system that provides optimal resource allocation.