1. Economic Regulation Shane Nolan Professor Deagan April 1, 2008

2. Market Failure Natural Monopoly Natural Monopoly - Cable TV, Electricity, Railroads, Telephones Asymmetric Information Asymmetric Information Externalities Externalities Inequities Inequities

3. Economic Regulation “a specialized bureaucratic process that combines aspects of both courts and legislatives to control prices, output and/or the entry and exit of firms in an industry” “a specialized bureaucratic process that combines aspects of both courts and legislatives to control prices, output and/or the entry and exit of firms in an industry” Main Focus on Markets: Main Focus on Markets: Entry- licensing Entry- licensing Pricing- Price ceilings, Earnings Sharing Exit/Production - output of firms

4. Example of Focus Taxi: Entry: Entry: - # of Licenses available in a city - # of Licenses available in a city Price Control: Price Control: - Set fares for taxi rides - Set fares for taxi rides Production/Exit: Production/Exit: - Taxi’s have to operate 24-hours - Taxi’s have to operate 24-hours

5. Tools of Regulation  Coerciveness  Directness  Automaticity  Visibility

6. Coerciveness - extent to which tool restricts individual or group behavior  High  Control over licensing/fines/prices

7. Directness - extent to which the entity authorizing a program is involved with carrying it out  Mixed Direct Direct - Controls entry, price, production/exit Indirect Indirect - Controls taxes and subsidizes

8. Automaticity - utilizes existing administrative structure (market/taxes) rather than creating a new administrative apparatus  Low Rarely used Rarely used - normally takes form of specialized, enduring bureaucratic process - normally takes form of specialized, enduring bureaucratic process

9. Visibility - visible in budget and policy processes and hence is politically salient in the democratic process  High Info is easily accessible Info is easily accessible -few citizens have motivation to do so -few citizens have motivation to do so

10. Management Concerns Gold Plating Gold Plating - engaging in unnecessary expenditures Excess Capacity Excess Capacity - more capacity than is needed to provide insurance Capital Intensive Investments Capital Intensive Investments - substituting capital investments for variable costs Cross-Subsidization Cross-Subsidization - one group pays a relatively high price enabling another group to pay a lower price

11. Main Concerns Efficiency vs. Equity Efficiency vs. Equity Legitimacy Legitimacy Effectiveness (feasibility) Effectiveness (feasibility) Flexibility Flexibility

12. Questions ?