International Handbook on Economic Regulation
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International Handbook on Economic Regulation

Edited by Michael A. Crew and David Parker

Michael Crew and David Parker have compiled a comprehensive, up-to-date and detailed analytical work on leading research issues in the economics of regulation. With contributions from international specialists in economic regulation, the Handbook provides a comprehensive discussion of major developments in both the theory and practice of regulatory economics. This book will be an indispensable source for both students and practitioners of regulation.
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Chapter 3: Regulation, Pricing and Social Welfare

Michael A. Crew and Paul R. Kleindorfer


Michael A. Crew and Paul R. Kleindorfer Introduction1 For many years applied microeconomic theory has developed clear prescriptions for efficient pricing for a regulated or public enterprise monopoly. These prescriptions balanced consumer and producer interests and accounted for a number of important elements of public enterprise, such as breakeven requirements, service quality and cost tradeoffs, and peak loads. Interest in the topic goes back many years, including the early work of Coase (1946), Lewis (1941) and Ramsey (1927). However, the well developed prescriptions of the theory stand out in contrast to the practice in public enterprise monopoly and even more so with regulated monopoly. In this chapter we review the theory and examine the divergence between it and practice. Despite the elegance and simplicity of the theory, with its obvious appeal to economists, its adoption in practice has been disappointing. While we show the stark contrast between theory and practice, we also point to some unifying principles by which to approach pricing of regulated or public enterprise monopolies. These principles are in the spirit of our now more modest expectations about realistic objectives for regulation. Our ability to derive unifying principles derives from advances that have been made in the last 20 years or so in the understanding of information in economics, the role of rents and rent seeking and information rents. First, we review the theory, including some of its origins and antecedents, but in the interests of readability and accessibility derivations and proofs are confined to the Technical...

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