Optimal Industrial Policy
The paper derives optimal industrial policy for natural monopoly. It compares the benefit and cost of privatization and regulation taking into account the problems of asymmetric information and of soft budget constraint for regulated firms. It helps to disantangle the notion of 'privatization' and the notion of 'deregulation'. It shows that unless some change occurs in demand or in technology, natural monopolies remain natural monopolies. Whether they should be under public or private ownership depends crucially on the government budget constraint. The optimal policy involves private structure when the opportunity cost of public funds is large.
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|Date of creation:||01 Jan 1999|
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