what is economic regulation?

government intervention to change expected market outcomes.

what does regulation mainly target?

entry and price regulation.

what is the normative approach? public interest.

regulation should fix market failures: natural monopoly, externalities and asymmetric information.

benevolent well informed regulator who wants to benefit consumers.

what are the limitations of the normative approach?

• regulators are not always benevolent.

• regulators may not know firms’ true costs.

• capture may occur.

what is the positive approach?

regulatioon exists becuase of political incentives, interest groups and capture.

what is the market failure behind natural monopoly?

• monopoly pricing creates deadweight loss.

• key trade off between cost efficiency from one firm and allocative efficiency missing a competitive price.

what is the market failure behind externalities?

negative externalities - over production, a need for tax.

positive externalities. - under provision, fix with subsidies.

coase approach means that government intervention is not required and private bargaining due to clear property rights.

what is the market failure behind merit/demerit goods?

• consumers misjusdge risks/needs. they may under/over consume.

• regulator may intervene to enforce labelling etc so the consumer knows what’s in the product.

• regulation may use safety standards and consumer protection.

what is the regulation behind adverse selection?

• regulator may not know true costs of firm.

• low cost firms may mimic high cost so they can earn profits.

• this makes efficient price regulation difficult.

what is the problem behind regulation when there is moral hazard?

• one party takes hidden actions after contracting.

• the regulator cannot perfectly monitor behaviour.

• firms may shirk or underinvest unless incentives are designed carefully.

what is regulatory risk and the hold-up problem?

• firms fear that regulators will change rules once investments have been sunk.

• set prices too low ex post, preventing cost recovery.

• discourages investment.

what is competition for market (franchising)?

• instead of regulating a monopoly, the government auctions the right to serve the market.

• lowest bid wins.

• reveals efficient firms and avoids information asymmetry.

limited bidders and collusion may undermine the outcome.

what is nationalisation and why is it helpful? why is it bad?

replaces private profit motives with welfare objectives. removes the problem of hold up.

run with the objective of maximising social welfare.

can invest in infrastructure without fear of ex post hold up.

reduces the risk of capture as private firms cannot lobby regulators.

politicians may distort decisions for electoral reasons.

public financnes may limit investment.