MONOPOLY REGULATION Natural monopoly In many industries, the social - - PowerPoint PPT Presentation

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Oct 09, 2022 136 likes •209 views

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,

SLIDE 1

MONOPOLY REGULATION

SLIDE 2

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

SLIDE 3

Alternative approaches to utility regulation

State-owned and state-run monopolies
Cost-based price regulation
Price-cap regulation
Access regulation and competition

SLIDE 4

State owned enterprises

Most European countries up until 1980s
Still the case for various basic utilities in Europe

SLIDE 5

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

SLIDE 6

Price-cap regulation

Thatcher’s privation program and Steve Littlechild

proposal

Incentives for cost reduction
Incentives for quality improvement

SLIDE 7

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?