Introduction to Economic Regulation I. Economic regulation vs. market determination Who gets regulated? By Whom? Why regulate? Economic regulation of monopoly? When regulation creates cartels. Regulatory failure and the seeds of deregulation.

I. Economic Regulation vs. Market Determination Something other than the maintenance of competition, sometimes its supplanting or outright prohibition. The subjects of regulation 1. Price (rate) levels 2. Price discrimination (rate structure) 3. Entry and exit 4. Product or service quality

II. Who gets regulated? Legal background Who are “the regulated industries?” 1. Electric, gas, water, sewer, etc/ 2. For-hire transportation and communication. But is it monopoly? Not necessarily. And who does the regulating?

III. Why regulate? “Public interest” explanations 1. Legislative declaration 2. Not necessarily market failure “Private interest” explanations 1. Regulation sought by the regulated. 2. Regulation sought by other interest groups The regulatory life cycle and regulatory “capture” “There oughta be a law!!!!!!!!!!!! "

IV. Economic Regulation of Monopoly The natural-monopoly problem Traditional utility regulation 1. Economic basis 2. Profit limitation /cost reimbursement 3. Incentive and change problems “Undue discrimination”—regulatory vs. economic conceptions and consequences.

V. When Regulation Creates Cartels (yes!!!) When competition is “inappropriate” 1. “Natural monopoly”—mistaken identity? 2. “Destructive competition” 3. “Network externalities” Examples 1. Railroads (and trucks, and ……) 2. Airlines (really?) 3. Telecommunications and entry barriers

VI. Why deregulation? Transportation regulation failed to solve the problems it was supposed to address: industry unprofitability and service. Communications-monopoly regulation resulted in blocking both customer choice and the spread of advanced technology. Because it was based on cost reimbursement, Utility-monopoly regulation lacked full incentives for efficient (or, in some cases, adequate) supply.

VI. Why deregulation? (cont.) D. To the extent that the agenda of any kind of regulation was the elimination of price discrimination, the elimination of true price discrimination became impossible. Worse, in the name of “fairness,” regulators required cross-subsidization of some markets, which both discriminated in favor of high-cost or small-market customers and left the profitable markets open to entry—unless that, too, could be policed.