Introduction

This outlines the book’s content: it is a new formal framework for the theory of perfectly competitive equilibrium and its industrial applications. Based in good part on ideas of Boiteux and Koopmans, the “short-run approach” is a scheme for calculating long-run producer optimum and market equilibrium by building on short-run solutions to the producer’s profit maximization problem, in which capital inputs and natural resources are treated as fixed. These inputs are valued at their marginal contributions to the operating profit. Since short-run profit is a concave but generally nondifferentiable function of the fixed inputs, their marginal values are defined as the generally nonunique supergradient vectors. Also, they usually have to be obtained as solutions to the dual programme of fixed-input valuation. The key property of the dual solution is therefore its marginal interpretation, but this requires the use of a generalized, multi-valued derivative of a convex function—the subdifferential—because an optimal-value functions are commonly nondifferentiable. Applied to the peak-load pricing of electricity generated by thermal, hydro and pumped-storage plants, the approach gives a sound and practical method of valuing the fixed assets (the river flows and the geological sites suitable for reservoirs).