Dec. 4 – Dec. 8 2023; as the first semester of my UCalgary MPP program draws to a close, it's astounding to reflect on how swiftly the weeks have passed, with the final day being December 5. This week in PPOL699: Competitive Policy, we continued our discussion on regulatory economics expanding from the previous 2 weeks.

We ventured into the challenging terrain of setting optimal prices for regulated natural monopolies, characterized by large fixed costs and the production of multiple output goods. We scrutinized the limitations of traditional pricing models in this context:

  • Marginal Cost Pricing: While ideal for eliminating deadweight loss, this model falls short as it leads to negative profits in the context of a natural monopoly.
  • Average Cost Pricing: This approach stumbles due to the difficulty in making appropriate cost allocations, especially when common/shared input costs are involved.

We concluded that optimal pricing in such scenarios requires a strategy that transcends direct cost allocations and ensures profitability beyond the marginal cost pricing level. Essentially, it's about striking a balance between profitability and minimizing deadweight loss, all within the confines of a zero-profit constraint for the firm.

The goal is to ensure the firm's viability without resorting to government subsidies and this is when we got introduced to Ramsey pricing which suggests varying the prices for different goods based on their demand elasticity. Ramsey pricing dictates that the price markup over marginal cost should be inversely related to the price elasticity of demand. In simpler terms, products with more elastic (price-sensitive) demand have smaller markups over marginal costs, while those with less elastic demand see higher markups. This method stems from the idea of optimal taxation developed by Ramsey, where the goal is to minimize distortions in the market while ensuring the financial viability of the firm.

Another key topic we discussed was the impact of capacity constraints on market dynamics. We revisited the Cournot Equilibrium graph, adding the dimension of capacity constraints to understand how firms behave under different competitive scenarios – whether as Cournot or Bertrand competitors with homogeneous goods. This led us to examine three distinct cases:

  1. Capacity Constrained Output: Where firms are limited by their capacity, leading them to set quantities equal to their capacity.
  2. Capacity Not Constrained: In this scenario, either firm can supply the entire market at a price equal to marginal cost, leading to the usual Bertrand Equilibrium.
  3. Edgeworth Cycles: A situation where at least one firm cannot supply the whole market, and at least one can produce at its best Cournot response function, raising questions about price equilibrium and market behavior.

During our PPOL602: Markets and Public Policy lecture, we embarked on a thorough review of all the semester's materials, preparing for the final exam.

In PPOL 619: Governance, Institutions, and Public Policy, we had group final presentations, showcasing our collective research and analytical skills. Our group presentation centered around a pressing issue: aligning Alberta's carbon emission policies with the federal framework to achieve a net-zero carbon economy by 2050. This task was particularly challenging given that approximately 25% of Alberta’s GDP stems from emission-intensive and trade-exposed (EITE) industries.

The objective of our briefing note was to forge a path for Alberta to strengthen its commitment to carbon neutrality by 2050. This involved navigating the complexities of global shifts toward low-carbon economies and addressing investor concerns about long-term risks. Our key recommendations included:

  1. Introducing Carbon Contracts for Difference (CCfDs): A strategy to spur investment in low-carbon technologies by mitigating financial risks associated with uncertain future carbon pricing.
  2. Planning for Milestone Years: Integrating the milestone years from the Canadian Net-Zero Emissions Accountability Act (CNZEAA) into Alberta's emissions reduction strategy.
  3. Re-evaluating CCUS Support: Focusing government policy and financial support on Carbon Capture, Utilization, and Storage (CCUS) projects with sustainable long-term prospects.
  4. Strengthening TIER: Advocating for the full pricing of electricity emissions by eliminating output-based allocations, thus encouraging a transition to cleaner energy sources.

As we conclude this semester, I look forward to carrying forward these insights into future endeavors and continuing to explore the intersection of policy, governance, and real-world challenges.

*Photo: The Kwakiutl Totem Pole Edmonton, AB taken Apr/04 2021.

Summit photo