Chapter 9 addressed the question of the computation of the socially efficient level of investment in generation and consumption assets. However, if we are to exploit the benefits of competitive markets, we would like to know if we can decentralise these investment decisions to private entrepreneurs. Is it the case that decentralised investment decisions by private entrepreneurs will lead to an efficient level of investment?
In Chapter 9, we derived the conditions that an omniscient central planner would follow to make optimal investment decisions. Now let us ask the question whether those outcomes can be achieved through decentralised decisions by private generation entrepreneurs.
As in Chapter 9, we will maintain the following assumptions:
We will assume that there are a large number of independent generation entrepreneurs. Since each can make an arbitrarily small investment in the ...