Rationale for regulation?

what is economic regulation?

intervention aimed at changing market outcomes, may change directly or indirectly.

what is the difference between ex-post and ex-ante?

ex-ante, regulator sets rules before actions.

ex-post regulators enforces punishment after misconduct.

why is natural monopoly a market failure?

• allocative efficiency is not reached as prices greater than MC.

• Cost efficiency is reached as AC falls with output and one firm minimises cost.

what is the regulatory response to negative externalities?

pigouvian tax.

what are the regulatory needs for negative externalities?

over production of a harmful good is in need of taxation

why regulate merit/demerit goods?

• Consumers misperceive risks/benefits.

• under/over consumption.

• e.g. safety standards and consumer protection.

why does the adverse selection become a problem in the regulation of natural monopolies?

• regulator doesn’t know what cost firm has, high or low.

• low cost pretends to be high and earns an information rent.

• regulator must design screening contracts.

why is regulation costly?

• design, enforcement and montioring.

• regulators need staff.

• firms incur compliance costs.

what do incomplete regulatory contracts lead to?

• regulators cannot wrtie a contract for every scenario.

• firms may innovate in a way regulators cannot anticipate.

• firms may exploit loopholes.

• enforcement may become harder.

why does the problem of moral hazard become a problem?

• firm’s actions cannot be perfectly detected.

• firms may shirk on quality.

• firms may inflate costs.

what is the problem of regulatory risk?

regulatory ex ante differ from ex post.

• regulator cuts prices.

• firms cannot cover sunk costs from investments made.

• firms choose not to enter.

HOLD UP PROBLEM.

what/why is competition for market a good idea?

• government auctions right to run the market.

• firms bid on price/quality. lowest bid wins.

• firms reveals their costs, avoids asymmetric information.

• few bidders may lead to collusion.

• firms may cut costs through quality cutting.

what is coesian bargaining?

• when private parties can negotiate to solve externalities themselves.

• no need for government intervention.

• if one party’s action harms the other, they can compensate and agree on a good outcome.

• property rights must be clear, and negotiation must be cheap.

why is nationalisation a good alternative?

• state owns and operates the monopoly rather than regulating a private firm.

• objectives line up with social welfare.

• long term investment becomes easier and stable.

• focuses on quality and access.

• no room for regulatory capture.