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Short-run Approach to Long-run Equilibrium in Competitive Markets : A General Theory With Application to
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The authors present a new formal framework forfinding the long-run competitive market equilibrium through short-runequilibria 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 bythermal, hydro and pumped-storage plants, it gives a sound and practical methodof valuing the fixed assets—in this case, the river flows and the geologicalsites suitable for reservoirs. Its main mathematical basis is the producer’sshort-run profit maximization programme and its dual; their solutions haverelatively simple forms that can greatly ease the fixed-point problem ofsolving for the general equilibrium. Since the optimal values (profit and costfunctions) are usually nondifferentiable—this is so when there are joint costsof production such as capacity constraints—nonsmooth calculus is employed toresolve long-standing discrepancies between textbook theory and industrialreality by giving subdifferential extensions of basic results ofmicroeconomics, including the Wong-Viner Envelope Theorem.