Government versus Market-based Allocation of Resources: Evidence from India’s Coal-fired Power Plants

Abstract

Market-based mechanisms for allocating resources are known to have efficiency benefits relative to command-and-control based allocation rules. However, government allocation of resources may be preferable in contexts where there are significant economies to scale or significant external costs. I study this trade-off for the government allocation of coal to India’s power plants for the sample period 2008-2015. I show that, relative to state-owned power plants, privately owned power plants: 1) import a higher percentage of their input coal, 2) are more likely to run out of coal to burn, and 3) are more likely to curtail their electricity generation due to these coal shortages. I present empirical evidence that this inefficient allocation of coal results in higher total fuel consumption for the same level of electricity generation, higher electricity market prices and lower system-wide reliability. This suggests that the government-based allocation of coal increases the system-wide costs of generating electricity without reducing the electricity prices paid by consumers or improving the reliability of electricity supply.