MONOPOLY REGULATION
Natural monopoly • In many industries, the social costs of having more than one supplier are very high − Water supply − Electricity − Telephone landlines? − Cable? − Airport or other infra-structures • Typically, demand elasticities are very low (in absolute value), so that monopoly prices would be very high • In these situations, so form of regulation may be called for
Alternative approaches to utility regulation • State-owned and state-run monopolies • Cost-based price regulation • Price-cap regulation • Access regulation and competition
State owned enterprises • Most European countries up until 1980s • Still the case for various basic utilities in Europe
Cost-based regulation • A.k.a. rate-of-return regualtion • Most common system in the US • Incentives: “gold plating” • Regulators party affiliation and regulated rates • Regulated rates and investment incentives
Price-cap regulation • Thatcher’s privation program and Steve Littlechild proposal • Incentives for cost reduction • Incentives for quality improvement
Access regulation and competition • In many industries, there is a bottleneck — an “essential facility” — but otherwise no natural monopoly • Solution: regulate access to essential facility, allow for competition otherwise • Problem: implementing access rules • Biding arbitration as a solution?
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