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Fare Evasion and Monopoly Regulation

Author

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  • Martin Besfamille
  • Nicolás Figueroa
  • León Guzmán

Abstract

We consider the regulation of a monopoly facing consumers that may evade payments, an important issue in public utilities. To maximize total surplus, the regulator sets the price and socially costly transfers, ensuring that the monopoly breaks-even. With costly effort, the firm can deter evasion. Under unit demand and fixed quality, price is independent of marginal cost, but increasing in the marginal cost of public funds. When quality is endogenous, we find sufficient conditions that imply a non-monotonic relation between price and marginal cost of public funds. We extend the model to consider non-unit demand and moral hazard. Keywords: Regulation, natural monopoly, evasion and marginal cost of public funds.

Suggested Citation

  • Martin Besfamille & Nicolás Figueroa & León Guzmán, 2022. "Fare Evasion and Monopoly Regulation," Documentos de Trabajo 566, Instituto de Economia. Pontificia Universidad Católica de Chile..
    • Handle: RePEc:ioe:doctra:566
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    Keywords

    regulation; natural monopoly; evasion and marginal cost of public funds;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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