Beruflich Dokumente
Kultur Dokumente
GROUP 6 DE V I NA M , E VA D, K A I L A S H H, N I K HI L K , RA TNAVA L I B
INTRODUCTION
Government interaction influences
firm conduct industry structure
WHY REGULATE?
Often to enhance public interest What is public interest?
Munn vs. the State of Illinois 1877 When one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good
Two contrasting opinions on what has been taken up as public interest interventions
Enhance social welfare Promote self-interest of citizens, interest groups, politicians
The perfect economy might not exist in reality due several market failures Government intervention required to raise social welfare But why do markets fail?
Government intervention are carried out to avoid such market failures by providing subsidies for the positive externalities and taxes for negative externalities.
Concession Contracts
Note of caution
The auction design should be competitive enough and the winner is the bidder who guarantees the citizens the lowest price to serve
Examples
U.S Cable industry ; U.K rail passenger service
ISSUES IN IMPLEMENTATION
Imperfect initial bid
Lack of bidders Imperfect information for bidders Collusion amongst bidders
Components
Advantages
Framework for insuring financiers Diminishes the risk to investors (stabilization of future revenues of projects with long term payback) Demand risks are adjusted in the formula Cost risks are adjusted by prior regulatory approval
But..
If allowed ROR exceeds the firms true Cost of Capital, firm has an incentive to overinvest in capital Little incentive to keep operating expenses down Incentive to game the timing of rate cases Will seek rate relief only when the costs go up, try to evade regulators if the costs go down
Disadvantages
Burdensome and detailed nature of rate casework Gaps in information held by firm and Government Subjective judgments might result in firm lobbying Untimely decisions due to time lag
Disadvantages
Firm will lose if it cannot keep cost below price cap. Firms financial stability might be threatened. Uncertainty at each price review might be a disincentive for efficiency.
Disadvantages
Vulnerable to information gaps Inflexibility to changing economic circumstances
Outlawing anti competitive practices Influence the rules for the exceptions
Regulatory Commissions
For permanent, impartial, technical experts to control the industry under regulation Advantage formal deliberative process for all interested parties to submit their views Disadvantage Time consuming, adversarial, costly
Single-Person Regulator
To centralize decision-making authority with staff support Advantage Speed, lesser resources required, accountability Disadvantage Singular perspective, vulnerability
THANK YOU!