Quality of Government Regulated Goods
18 Pages Posted: 5 Sep 2010 Last revised: 24 Oct 2010
Date Written: October 24, 2010
Regulators face the difficult task of determining the sets of price and quality of government regulated goods. While the profit maximizing monopoly always produces less in quantity than under free competition, the level of quality produced by the monopoly is not unequivocal: it depends on its cost and demand functions. The social effect of quality change is not unequivocal, either, because it depends, apart from the cost function change, on the shift and tilt change of the demand curve. The problem lies in determining how the price elasticity of basic need goods responds to quality change and whether this change of quality is socially desirable. This paper analyzes quality as a decision variable in the government regulated goods sector. Because the quality of government regulated goods reminds an externality, in particular cases the optimal level of the quality of these goods can be determined. Paradoxically, rate-of-return regulation may even make it impossible to achieve Pareto efficient contracts for government regulated goods.
Keywords: Infrastructure, Regulation of Quality, Coase Theorem
JEL Classification: H54, L15, L51
Suggested Citation: Suggested Citation