The Short-Run Approach to Long-Run Equilibrium in Competitive Markets

The authors present a new formal framework for finding the long-run competitive market equilibrium through short-run equilibria by exploiting the operating policies and plant valuations. This short-run approach develops ideas of Boiteux and Koopmans. Applied to the peak-load pricing of electricity generated by thermal, hydro and pumped-storage plants, it gives a sound and practical method of valuing the fixed assetsin this case, the river flows and the geological sites suitable for reservoirs. Its main mathematical basis is the producers short-run profit maximization programme and its dual; their solutions have relatively simple forms that can greatly ease the fixed-point problem of solving for the general equilibrium. Since the optimal values (profit and cost functions) are usually nondifferentiablethis is so when there are joint costs of production such as capacity constraintsnonsmooth calculus is employed to resolve long-standing discrepancies between textbook theory andindustrial reality by giving subdifferential extensions of basic results of microeconomics, including the Wong-Viner Envelope Theorem.