Producer Protection, Prior Market Structure and the Effects of Government Regulation

3100 Words Dec 21st, 2011 13 Pages
Producer Protection, Prior Market Structure and the Effects of Government Regulation

Assignment on Regulatory Economics

1/5/2012 INTRODUCTION
The direct economic regulation of business by independent government commissions has a one-hundred year history on the North American continent. It is generally asserted that the purpose of such commissions is to protect consumers from exploitation by limiting the economic powers of certain firms having pervasive effects on the public interest (for example, transportation companies and public utilities). . However, the findings of the relatively few em-pirical studies of the economic effects of regulation indicate that important differences actually do exist in these effects. The
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One group should include those industries whose prior market structure was a natural monopoly. This group would include electric utilities, natural gas pipelines, local gas distribution companies, telephone companies, etc. The second group should consist of industries having oligopolistic or competitive market structures prior to the implementation of regulation, for example, airlines, motor carriers, railroads, and water carriers.
If the producer-protection hypothesis is descriptive of the fundamental effects of regulation, one would expect to find regulation having little or no effect on the first group, whereas the second group would experience substantial changes following the effective implementation of regulation. NATURAL MONOPOLY INDUSTRIES
Among other things, effective monopolies are characterized by relatively high price levels, by extensive price discrimination, and by rates of return on investment exceeding those attainable if the firm operated in a competitive market structure. Thus, the producer-protection hypothesis implies that following the implementation of regulation over natural monopolies, the price level will be essentially unchanged and will be above marginal costs, price discrimination will continue to be widely practiced, and rates of return will remain above those which would exist under competition.
Price level
At least three studies have been made regarding the effects of regulation on electric utility price
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