In this chapter, we present the major market failures and behavioural anomalies that are relevant to analyse energy and climate issues from an economic point of view. We start with a discussion on positive and negative externalities; next we discuss the public goods and common resource problem, followed by a presentation of the principal–agent and information problems, and then we provide a summary of the role of lack of competition in energy and energy-related markets. An important aspect described in this chapter is the role of behavioural anomalies, such as bounded rationality and bounded willpower. At the end of the chapter, we describe the most important energy and climate policies as well as the concept of sustainable development that should guide policy design. We also discuss issues in developing countries related to the topics discussed in the chapter.

In this chapter, we present the most important market forms that are relevant for understanding the functioning of energy markets and energy-related markets. This presentation is introduced by a deep discussion on the concepts of economies of scale and density, that are relevant to understand these market forms. We then discuss the following market forms: monopoly, perfect competition, monopolistic competition, and oligopoly. The presentation of these market forms is also integrated with some applications in the energy sector. For example, after presenting monopolies in a general way, we describe the natural monopoly and role regulation in the electricity and gas distribution sectors. At the end of the chapter, we discuss issues in developing countries related to the topics discussed in the chapter.

Economics is a central science to the understanding of regulation. Regulatory economics focuses on economic concepts that are relevant in regulatory contexts. Chapter 1 introduces key concepts of economics and regulatory economics, referring to a branch of social sciences concerned with how society chooses to employ its scarce resources to produce goods and services. This chapter offers a brief discussion of economic concepts that have shaped regulation (e.g., monopoly, market failures). It also discusses behavioral economics, the commons, and principal-agent theory.

This chapter introduces topics that extend beyond the electricity market, and focuses in particular on oil, natural gas, and biofuels. Short- and long-term equilibriums are analyzed in the context of oil markets. Monopolies, cartels, and the model of the dominant firm are also analyzed in the context of the oil market. The tax incidence problem is formulated as an equivalent optimization problem and analyzed in the context of natural gas markets. One-way substitutability is analyzed in the context of biofuel markets, and the tortilla crisis is illustrated through an optimization model. Hotelling’s rule is stated and proven by considering a dynamic optimization model of a finite nonrenewable resource that is gradually depleted over time while satisfying a price-elastic demand.

Elasticity of demand is introduced and it is shown how this characterises how revenue will change upon a price increase (the two distinct possibilities being represented by elastic and inelastic demand). Profit maximisation is considered in general, and it is shown that, when maximising profit, marginal revenue and marginal cost must be equal. Two very different cases are then studied: that in which the firm is a monopoly and that of perfect competition.

After the Civil War, the Industrial Revolution was also in full swing as a new form of capitalism took hold and the American economy leaped forward. The country also experienced sudden urbanization as immigrants from Europe and Americans flocked to the cities from the farms in search of better employment. At the same time, large corporations, with sophisticated Wall Street financing, were able to amass great wealth, often by using anti-completive means to eliminate competitors. Finance capitalism also brought a rash of social ills including slums, dangerous foods and drugs, dangerous workplaces, and increasing poverty as workers were forced to yield to the low wages offered by corporate employers. In response to the concentrated power held by private corporations, Progressive reforms urged countervailing power that was needed in the form of the federal government. Federal legislation was passed to control monopolies, monitor unfair railroad rates, and regulate tainted foods and meats among other forms of new regulation, as the federal government took on a new role of policing markets in addition to supporting economic prosperity.

There are two major paradigms of the market: the neoclassical static equilibrium theory and the Austrian School (and Schumpeterian) dynamic non-equilibrium theory. The most important difference between the two is their different understandings of the entrepreneur’s status and function in the market. The market in neoclassical economics is a market without entrepreneurs. On the contrary, entrepreneurs are central to the market in Austrian School economics and Schumpeterian economics. The neoclassical model is not a good market theory and its market failure theory is wrong. By placing entrepreneurs at the center of the market, the Austrian School of economics provides a better understanding of the market. This chapter also points out the eight paradoxes of the neoclassical model. These eight paradoxes show that neoclassical economics totally distorts our understanding of the real market.

This chapter discusses mainstream economics’ misunderstanding of monopoly law. Mainstream economics’ conceptions of competition and monopoly are incorrect. Ignoring entrepreneurship is the primary reason for this misunderstanding. Entrepreneurship and competition are two sides of the same coin. In markets with free entry, competition always exists because competition is the essence of entrepreneurship. True monopolies necessarily come from governmental – or related entities’ – limits on market entry or preferential treatment. As long as freedom of entry exists, entrepreneurs will always attempt to find new opportunities and innovative methods to overthrow the current market leader. Entrepreneurship is the best anti-monopoly law because it is more conducive to the breakdown of monopolies than any legal provisions or policies.

In Chapter 10, we discuss monopoly, degrees of monopoly power, and the “price searching” behavior of firms who have discretion over price. We detail various (natural and artificial) barriers to entry (and exit). We provide a conventional description of the inefficiencies of monopoly power, but also note how the possibility of (at least short-term) monopoly profits provides a useful (if not necessary) incentive for entrepreneurs to innovate and create new markets.

As scholars and activists seek to define and promote greater corporate political responsibility (CPR), they will benefit from understanding practitioner perspectives and how executives are responding to rising scrutiny of their political influences, reputational risk and pressure from employees, customers and investors to get involved in civic, political, and societal issues. This chapter draws on firsthand conversations with practitioners, including executives in government affairs; sustainability; senior leadership; and diversity, equity and inclusion, during the launch of a university-based CPR initiative. I summarize practitioner motivations, interests, barriers and challenges related to engaging in conversations about CPR, as well as committing or acting to improve CPR. Following the summary, I present implications for further research and several possible paths forward, including leveraging practitioners’ value on accountability, sustaining external calls for transparency, strengthening awareness of systems, and reframing CPR as part of a larger dialogue around society’s “social contract.”

Chapter 2 probes early reformers’ modes of rhetoric. To raise awareness of distant injustices in the post-Emancipation era, they denounced the anomalous “virtual slavery” suffered by famine-stricken peasant cultivators, subordinated Indian princes, and the British working classes alike. This chapter clarifies how reformers were conceptualizing virtual slavery as an act of coercion and dehumanizing instrumentalization that was as injurious as chattel slavery. In so doing, they employed two rhetorical scripts: one that highlighted these virtual slaves’ degradation under colonial and monopolistic rule, and one that protested the conversion of native sovereigns into dishonored, disposable tools.

Adam Smith argued that, as the monopoly provider of religious services, the medieval Church represented a formidable impediment to economic development. How did the Church maintain its monopoly; and how did that monopoly break down in the Reformation? Further, given that the secular lords had a substantial comparative advantage in violence relative to the Church, how did the Church maintain its power? In addressing these questions, Smith developed a rich and systematic approach to the incentives, institutions, and competition surrounding the medieval Church.

Of particular concern in the literature on business is the importance of trust and the disabling consequences of broken trust on business partnerships. Chapter 3 draws on extensive interviews in exploring the issue of trust, and reports novel findings which lead to new theoretical formulations. It has been central in sociological understanding that embeddedness in social and business exchanges generates and maintains interpersonal trust. Should opportunistic behaviour or violation of trust occur it is routinely assumed that such breaches would be exposed or punished, including reputation loss and exclusion from future exchange opportunities. What is less explored is that breaches of trust in many instances may not lead to disclosure of such a behaviour or termination of exchange relationships. Chapter 3 expands our understanding of broken trust. It identifies and explores mechanisms which operate in avoidance of confrontation, exposure and retaliation in instances of breaches of trust and also strategies employed by entrepreneurs in continuation of exchange relationships with violators of trust. The chapter examines underexplored aspects of the complexity and dynamics of business exchange relations and points to a rethinking of trust and social exchange.

If a firm is a nexus of contracts, then it is just the sum of its counterparties. It follows that when a firm monopolizes a particular market and exploits its power to impose unfavourable terms on a counterparty, the firm necessarily exploits one counterparty for the benefit of another, because the additional profits the firm generates from the unfavourable terms must be paid out eventually to some other counterparty of the firm. One alternative to attacking monopoly power through breakup of large firms or limits on anticompetitive conduct in the marketplace is therefore to prevent any one counterparty of the firm from so dominating firm governance as to be able to induce the firm to oppress other counterparties for its benefit. Creating a balance of power in firm governance, by giving each class of counterparties (i.e., workers, suppliers, investors, and consumers) an equal say over the choice of board members, would eliminate the internal forces that induce firms to exercise monopoly power. But it would not prevent firms from engaging in productive, pie-expanding, behaviour, because such behaviour tends to expand the business that the firm does with all of its counterparties—or at least enables the firm to use a share of the gains to compensate those counterparties that lose out—and therefore benefits them all.

India and Pakistan adopted modern competition legislations in 2002 and 2007 respectively. This chapter traces and compares the adoption of modern competition legislations in the two countries to understand how these shaped the schemes and ambits of these legislations as well as the extent of their compatibility with and legitimacy in their respective countries. The chapter appraises the pre-conditions of transfer in India and Pakistan focusing particularly on their legal and political institutional landscapes and evaluates their respective motivations for adopting modern competition legislations. It also identifies the transfer mechanisms and the nature and range of legal and political institutions engaged by these countries in the course of adoption, and examines how the interplay of these institutions impacts the compatibility, legitimacy, and content of the adopted legislations.

The chapter looks at Churchill’s economic ideas as a Liberal and then Conservative and their impact on his actions. Churchill was a free trader and accepted the self-correcting specie-flow mechanism of the Gold Standard. His political economy before 1914 rested on interventions to remove monopoly power and market imperfections that would allow ‘competitive selection’ by free enterprise and encourage individual responsibility. After the war, strains appeared in this coherent set of assumptions. Churchill’s tenure as chancellor was marked by creative accounting for pragmatic political reasons. He remained a devotee of sound finance and balanced budgets, and despite some reservations on the issue of the return of the Gold Standard, he could not go against the advice of Treasury officials and the Bank of England, or his own ‘deeply internalized convictions’ that coincided with their assumptions. After 1929 he took little systematic interest in economics. Churchill’s coherent political economy of free trade and the Gold Standard collapsed and he had nothing in its place.

In this final chapter, we emphasize the importance of competition in health care markets. The antitrust laws can be used to promote competition and thereby save consumers, health insurers, and the government billions of dollars. Although many policymakers call for a complete replacement of the US health care system, we offer remedies that can be implemented immediately.

In Economics 101, we learn that competition and competitive markets provide the biggest bang for the buck. Market imperfections, however, impair the competitive process and introduce inefficiencies that, in time, reduce the well-being of society. In this chapter, we discuss how the antitrust laws can be used to promote competition in the US health care sector, which could save consumers, health insurers, and the government billions of dollars. We provide a road map of the issues that we will discuss in later chapters.