Design of mechanisms for demand response programs

We prove the inefficiency (in the sense of Pareto) of the electricity system, as well as its resemblance with the tragedy of the commons. Also, we present a mechanism intended to achieve efficiency in the electricity consumption by means of economic incentives. The proposed incentives might be seen as an indirect revelation mechanism, in which users do not have to reveal private information about their preferences. Instead, a particular incentive is calculated for each user, based solely on its relative consumption. We conclude that the success of the proposed mechanism requires subsidies from external institutions, at least during the transition between an inefficient outcome and the efficient equilibrium.