Is Cost-of-Service Regulation Worth the Cost?
AbstractCost-of-service regulation that reduces prices will also reduce incentives to control cost. Increased output counteracts this trend when there are economies of scale. We derive closed-form approximations for the maximum cost increase that leaves a positive welfare gain when regulation reduces price by some percentage. To be useful to regulators, these approximations depend only on demand elasticity and the ratio of fixed to total cost. For low demand elasticities typical of regulated industries, price must fall by half to outweigh cost increases of as little as 2%. Cost-of-service regulation appears to reduce welfare unless economies of scale are strong. These conclusions may be reversed if regulators favor consumers, but only a slight bias in favor of the firm exacerbates them. Regulatory methods that preserve incentives to be efficient by divorcing price from cost become more appealing.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.
Volume (Year): 3 (1996)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.tandfonline.com/CIJB20
Find related papers by JEL classification:
- JEL - Labor and Demographic Economics - - - - -
- cla - - - - - -
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Brennan, Timothy, 1999. "Do Lower Prices For Polluting Goods Make Environmental Externalities Worse?," Discussion Papers dp-99-40, Resources For the Future.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.