  This paper investigates the efficiency loss in social cost caused by
strategic bidding behavior of individual participants in a supply-demand
balancing market, and proposes a mechanism to fully recover equilibrium social
optimum via subsidization and taxation. We characterize the competition among
supply-side firms to meet given inelastic demand, with linear supply function
bidding and the proposed efficiency recovery mechanism. We show that the Nash
equilibrium of such a game exists under mild conditions, and more importantly,
it achieves the underlying efficient supply dispatch and the market clearing
price that reflects the truthful system marginal production cost. Further, the
mechanism can be tuned to guarantee self-sufficiency, i.e., taxes collected
counterbalance subsidies needed. Extensive numerical case studies are run to
validate the equilibrium analysis, and we employ individual net profit and a
modified version of Lerner index as two metrics to evaluate the impact of the
mechanism on market outcomes by varying its tuning parameter and firm
heterogeneity.
