Problem
The national electricity markets in the Nordic countries (Denmark, Finland, Norway, and Sweden) used to be protected from foreign competition and dominated by one power company. Between 1996 and 2000 far-reaching reforms were introduced establishing one integrated electricity market. A common power exchange was established (Nord Pool), international transmission links were opened to other players, and border tariffs were abolished. After 2000, the Nordic electricity market was even broadened by establishing trading links with Poland and Germany. We will analyse these developments using the imperfect competition framework of Markusen by concentrating on the Swedish national electricity market.
Task
i. Why can the Swedish monopolist charge an electricity price far above marginal cost? Is it 'fair' to charge a price above marginal costs?
ii. Assume that Sweden first established an integrated electricity market with Norway. What happens to the amount of electricity offered and the electricity prices on the Swedish market?
iii. Who are the winners and who are the losers from the integrated electricity market with Norway? Explain.