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Regulatory Failure: Time for a New Policy Paradigm

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  • Alleman, James
  • Rappoport, Paul

Abstract

Regulation is presumed to be designed to avoid (potential) market failures,usually because of firms' market power, the consequence of which leads to a decrease in economic welfare. However, the cost of regulation may outweigh any effects policy makers have on the firm due to administrative costs, regulatory capture and other effects that have been addressed by others. More importantly, policy makers have been using the wrong models to guide their decisions, with a major impact on the investment incentives of firms, a misallocation of resources and a lowering of social welfare. As policy makers misread economic theory, they produce results worse than those they are attempting to correct. Thus, these distorting effects are equally as bad, or worse than, the market failure regulators hoped to ameliorate. However, this need not be the case. By concentration on dynamic models, rather than the simple static models on which policy makers have focused, it is possible to improve economics welfare and obtain results that at least are better than the costs associated with current regulatory practices. Ofcom appears to be moving in this direction. Will other policy makers learn from Ofcom? This paper shows some of the failures of the current model and sets forth some of the necessary steps to make improvements. However, it is unclear whether the institutional structures will allow for such a departure from the current paradigm.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2517.

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Date of creation: Dec 2005
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Handle: RePEc:pra:mprapa:2517

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Keywords: competition; economic dynamics; neoclassical economics; pricing policy; regulation;

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References

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  1. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
  2. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262621509, December.
  3. Nuttall, R. & Vickers, J., 1996. "Competition Policy for Regulated Utility Industries in Britain," Economics Series Working Papers 99178, University of Oxford, Department of Economics.
  4. Crandall Robert W. & Ingraham Allan T & Singer Hal J, 2004. "Do Unbundling Policies Discourage CLEC Facilities-Based Investment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 4(1), pages 1-25, June.
  5. David S. Evans & Richard Schmalensee, 2002. "Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries," NBER Chapters, in: Innovation Policy and the Economy, Volume 2, pages 1-50 National Bureau of Economic Research, Inc.
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Cited by:
  1. Shane Greenstein, 2008. "Economic Experiments and Neutrality in Internet Access," NBER Chapters, in: Innovation Policy and the Economy, Volume 8, pages 59-109 National Bureau of Economic Research, Inc.
  2. Jackie Krafft & Evens Salies, 2008. "Why and how should innovative industries with high consumer switching costs be re-regulated?," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2008-13, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Krafft, Jackie & Salies, Evens, 2008. "The diffusion of ADSL and costs of switching Internet providers in the broadband industry: Evidence from the French case," Research Policy, Elsevier, Elsevier, vol. 37(4), pages 706-719, May.
  4. Jackie Krafft & Evens Salies, 2008. "The cost of switching Internet providers in the broadband industry, or why ADSL has diffused faster than other innovative technologies: Evidence from the French case," Post-Print hal-00203512, HAL.
  5. Jan Markendahl & Martin Johnsson, 2007. "Ambient networking and related business concepts as support for regulatory initiatives and competition," Netnomics, Springer, Springer, vol. 8(1), pages 105-121, October.
  6. Krancke, Jan & Vidal, Miguel & Fier, Andreas, 2012. "Changing the rules: Applying a more economic approach to dynamic telecom markets," 23rd European Regional ITS Conference, Vienna 2012 66976, International Telecommunications Society (ITS).

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