The authors present a new formal framework for finding the long-run competitive market
equilibrium through short-run equilibria 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 by thermal hydro and pumped-storage plants it
gives a sound and practical method of valuing the fixed assets-in this case the river flows
and the geological sites suitable for reservoirs. Its main mathematical basis is the producer's
short-run profit maximization programme and its dual their solutions have relatively simple
forms that can greatly ease the fixed-point problem of solving for the general equilibrium.
Since the optimal values (profit and cost functions) are usually nondifferentiable-this is so
when there are joint costs of production such as capacity constraints-nonsmooth calculus is
employed to resolve long-standing discrepancies between textbook theory and industrial reality
by giving subdifferential extensions of basic results of microeconomics including the
Wong-Viner Envelope Theorem.
