A Smart Grid Optimized for Whom?

Here's a classic problem in behavioral ethics -- what's a "fair" rationing strategy for a scarce commodity?

If you can only meet 90% of demand for something, what should you do? Deprive everyone of 10% of what they would like or deprive 10% of people of everything that want? Or something in between? It gets complicated when 90% supply is actually equivalent to 0% because of threshold effects -- uncommon in many situations but very common in others. Economic theory tells us that in a situation where demand exceeds supply, prices will rise until balance is restored (price rationing) and/or supply will expand until demand can be met at the current price (which is a form of temporal rationing if it takes a long time to add new supply). In the second approach, you can often get oversupply (all suppliers act independently to add capacity) which actually depresses prices for a while.

For some well-studied examples (urban highway capacity is one such case), adding supply actually triggers more demand -- a constant cycling between relatively long periods of shortage and short periods of abundance that planners know will happen, but can't "see" in the planning data because unmet demand is invisible. Surveys to measure unmet demand and alternative scenario simulations help justify additional capacity, but only so much -- and it's hard to justify a capital investment that won't get used until some hard to identify future date.

Continued at Harvard Business Review