Regulation and efficiency in markets with friction

We analyse the efficiency of markets with friction, particularly power markets. We model the market as a dynamic system with {d_t; t ≥ 0} the demand process and {s_t; t ≥ 0} the supply process. Using stochastic differential equations to model the dynamics with friction, we investigate the efficiency of the market under an integrated expected cost function. Under this model, an efficiency-volatility tradeoff theorem is presented.