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Regulating without Cost Information: The Incremental Surplus Subsidy Scheme

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  • Sappington, David E M
  • Sibley, David S

Abstract

The authors propose a regulatory mechanism, called the incremental surplus subsidy (ISS) scheme, that can be implemented even when the regulato r has no knowledge of the monopolist's cost structure. The regulator need only share the firm's knowledge of demand (which may be imperfec t) and be able to observe (with a lag) the firm's expenditures. The I SS scheme induces the firm to set marginal cost prices, to minimize p roduction costs, and to undertake efficient investment levels. It als o severely limits the firm's rents, and eliminates them altogether if the firm's discount rate is known. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
  • Handle: RePEc:ier:iecrev:v:29:y:1988:i:2:p:297-306
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    References listed on IDEAS

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    1. Chiarella, Carl, et al, 1984. "On the Economics of International Fisheries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 85-92, February.
    2. Arrow, Kenneth J. & Chang, Sheldon, 1982. "Optimal pricing, use, and exploration of uncertain natural resource stocks," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 1-10, March.
    3. Deshmukh, Sudhakar D & Pliska, Stanley R, 1980. "Optimal Consumption and Exploration of Nonrenewable Resources under Uncertainty," Econometrica, Econometric Society, vol. 48(1), pages 177-200, January.
    4. Richard J. Gilbert, 1979. "Optimal Depletion of an Uncertain Stock," Review of Economic Studies, Oxford University Press, vol. 46(1), pages 47-57.
    5. Eswaran, Mukesh & Lewis, Tracy R, 1984. "Appropriability and the Extraction of a Common Property Resource," Economica, London School of Economics and Political Science, vol. 51(204), pages 393-400, November.
    6. Gilbert, Richard J, 1977. "Resource Extraction with Differential Information," American Economic Review, American Economic Association, vol. 67(1), pages 250-254, February.
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