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Integrated versus Separated Regulation: An Application to the Water Industry

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  • Barolini, David

Abstract

The regulation of monopolistic firms has been widely investigated in the economic literature. Particular emphasis has been placed on the relationship between the regulated monopolist and the regulator. The present work deals with problems that may arise from the presence of several regulators. If regulators have different objective functions, inefficiency is likely to arise. A theoretical model with two regulators, one monopolistic firm and a renewable natural resource is presented. In this set up the level of demand relative to the sustainable use of the water resource plays a major role. The main result is the characterization of the cases in which the outcome of the regulation actually differs between the integrated-regulator and the separate-regulator scenarios. We find that the main determinants of the equilibrium are the level of demand and the marginal environmental damage. The equilibria obtained are analyzed in terms of price, environmental tax levels, and in terms of welfare distribution among the components of the regulator(s)' objective function.

Suggested Citation

  • Barolini, David, 2006. "Integrated versus Separated Regulation: An Application to the Water Industry," Economics Discussion Papers 8899, University of Essex, Department of Economics.
    • Handle: RePEc:esx:essedp:8899
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    1. Jean-Jacques Laffont & David Martimort, 1999. "Separation of Regulators Against Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 232-262, Summer.
    2. David P. Baron, 1985. "Noncooperative Regulation of a Nonlocalized Externality," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 553-568, Winter.
    3. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
    4. Martimort, David, 1999. "Renegotiation Design with Multiple Regulators," Journal of Economic Theory, Elsevier, vol. 88(2), pages 261-293, October.
    5. Herbert Dawid & Christophe Deissenberg & Pavel Ševčik, 2005. "Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game," Springer Books, in: Alain Haurie & Georges Zaccour (ed.), Dynamic Games: Theory and Applications, chapter 0, pages 175-192, Springer.
    6. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
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