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Netz, Janet S. --- "Price Regulation: Theory and Performance" [2012] ELECD 434; in Van den Bergh, J. Roger; Pacces, M. Alessio (eds), "Regulation and Economics" (Edward Elgar Publishing, 2012)

Book Title: Regulation and Economics

Editor(s): Van den Bergh, J. Roger; Pacces, M. Alessio

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847203434

Section: Chapter 2

Section Title: Price Regulation: Theory and Performance

Author(s): Netz, Janet S.

Number of pages: 39

Extract:

2 Price regulation: theory and performance
Janet S. Netz



1. OVERVIEW

1.1 Introduction

Economists have long recognized that the market outcome for natural monop-
olies leaves much to be desired. In particular, price is higher and output is
lower than the social optimum. Recognition of this problem, among other
issues, has led to a long history of attempts to regulate natural monopolists and
to a vast literature discussing the problems of attempts at regulation.1 The goal
of this survey is to lay out the economic (efficiency) problems caused by
natural monopolies, the various forms of regulation that have been attempted,
and their economic effects.
The survey is organized as follows. In Section 1.2, I present the basic issue:
that is, why regulate at all? I focus on the natural monopoly problem, though
much price regulation occurs outside industries that are natural monopolies. I
briefly discuss examples of price regulation that move the outcome towards the
social optimum. Those familiar with the theory of natural monopolies can skip
this section. Perhaps the most widely used early form of price regulation was
rate-of-return regulation, which I describe in Section 2.1. Though under this
model the regulator specifies an allowed rate of return, in practice rate-of-return
regulation is implemented when the regulator specifies the allowed prices that a
regulated firm may charge that the regulator estimates will give the firm the
allowed rate-of-return. As summarized in Section 2.2, Averch and Johnson
(1962) ...