Edited by David Parker and David Saal
Chapter 22: Regulation: Theory and Concepts
Dieter Bös Introduction Public utilities are enterprises which supply essential goods or services, where ‘essential’ means that they cannot be cut oﬀ without danger of total or partial collapse of an economy. From an allocative point of view these enterprises contribute to the infrastructure of the economy, while from a distributional point of view they contribute to providing consumers with necessities of life. The most important public utilities can be found in the areas of electricity, gas, water, telecommunication, postal services, radio, TV, airlines, railroads and urban public transport. It is not the ownership but the lack of competition which justiﬁes regulation of the activities of public utilities. Accordingly, privatization does not necessarily imply the end of government regulation. If it is impossible to expose a public utility to competition, then price and quality regulation typically are regarded as inevitable, in spite of the government’s interest in withdrawing from intervention in the particular ﬁeld as signalled by the very act of privatization. This raises the question of how far competition can be introduced in the supplies of telecommunication, rail and the like. For a long time this question was not asked, because all public utilities were thought to be ‘natural monopolies’, characterized by a subadditive cost function1 and by sustainability:2 it is cheaper to produce goods by a monopoly than by many ﬁrms, and potential market entrants can be held oﬀ without predatory measures. In such cases unregulated private enterprises would exploit the market. Therefore regulation is...
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