RE: Joskow

Dan Perry ( dperry@unigard.com )
Tue, 6 Apr 1999 10:56:48 -0700

Those darned economists (forgive me if there are any of you in this =
group).
Anyway, I have always had trouble with these kind of economic =
arguments, but
I will attempt to explain anyway. Anyone who has other insights please
correct me if I am wrong.
=A0
Basically if the earned rate of return is greater than the opportunity =
cost
of capital then capital will enter the industry. On the other hand if =
the
earned rate of return is less than the opportunity cost of capital, the
capital will leave the industry. On Figure 2(b), if you look to the =
right of
(Pi/Ki)*2, the earned rate of return (rI) is less than the opportunity =
cost
of capital (rIC) which would imply that capital should leave the =
industry.
If that is the case, however, the premium to capital ratio (P/K) will
increase so it will diverge away from (Pi/Ki)*2. On the other hand, if =
you
look at the graph in between (Pi/Ki)*1 and (Pi/Ki)*2 the earned rate of
return is greater than the opportunity cost of capital, so more capital
should flow into the industry. This would decrease the P/K ratio, so =
once
again, it would diverge away from (Pi/Ki)*2. The only place where the
equilibrium is stable is then (Pi/Ki)*1.

-----Original Message-----
From: Louise Chung [mailto:lchung@allstate.ca]
Sent: Wednesday, March 24, 1999 6:02 AM
To: studygroup8@lists.casact.org
Subject: Joskow

Would somebody please explain to me the fol.:
=A0
Why is it that in case(b) (p414), only the lower (P/K) is stable?
=A0
Why is it stated that in case (a), any (P/K) value can be supported at =
some
value for I whereas in case (b), only a limited range of stable values =
for
(P/K) can be supported by varying I?
=A0
Thx.