Two main category of Gov.Regulation is:
- Economic (control the prices that regulated firms are permited to charge in order to prevent excessive monopoly profits and predatory competitive practices)
- Cost-of-service Regulation (prices based on Avg.Cost of producing)
- Rate-of-return Regulation (prices that doesn't earn positive economic profit)
- Social (set product quality, safety, and safety of employees on workplace)
Effects of Regulation
- Creative Response (adequate but not intent). One example is the "Feedback Effect".
- Capture Hypothesis (firms will influence Reg.Agency)
- Share-the-gains, Share-the-pains (Reg.Agency will try to satisfy Gov.,Customer & Firms)
Conclusion
- Regulation
- More regulation -> higher cost of production -> higher prices for consumer
- Not easy to measure the cost impact of regulation
- Deregulation
- Negative effects on short-term (lower quality, higher prices)
- Positive effects on long-run (better quality, variety and lower cost)
- Contestable Markets - Number of firm is not determinant on the price (the market adjust automaticaly, excessive profit incentive more firms, lower profit you have bankrupts)
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