Regulation of two-part tariffs and quality choice under uncertainty
Many utilities are regulated with respect to prices and quality, and there is uncertainty about market conditions when regulation is chosen. We consider four different regulation regimes, based on two-part tariffs: A cap on the fixed fee is combined with either (i) quantity and quality standards, (ii) price and quality standards, (iii) price standards and quality bonuses, or (iv) quantity standards and quality bonuses. It turns out that there is a clear ranking of the four regimes in terms of expected welfare. The best results are obtained by regime (iv) with fixed fee caps, quantity standards, and quality bonuses.
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