Regulacion

Baldwin, R., Cave, M. ( 1999 ). Why regulate ?. En Understanding regulation:theory, strategy, and practice (pp.9-17)(384p.). New York : Oxford University Press. (C27223)

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Why Regulate?

Motives for regulating can be distinguished from technical justifications for regulating. Governments may regulate for a number of motives-for example they may be influenced by the economically powerful and may act in the interests of the regulated industry or they may see a particular regulatory stance as a means to re-election. Different commentators Iflay analyse such motives in different ways and a variety of approaches to such analysis will be discussed in Chapter 3. To begin, though, we should con- sider the technical justifications for regulating that may be given by a government that is assumed to be acting in pursuit of the public interest. 1

Many of the rationales for regulating can be described as instances of

'market failure'. Regulation in such cases is argued to be justified because the uncontrolled market place will, for some reason, fail to produce behaviour or results in accordance with the public interest." In some sectors or circumstances there may also be 'market absence'-there may be no effective market-because, for example, households cannot buy clean air or peace and quiet in their localities.

1. Monopolies and Natural Monopolies

Monopoly describes the position in which one seller produces for the entire industry .or market. Monopoly pricing and output is likely to occur and be sustained where three factors obtain:"

1 For detailed reviews of public interest reasons for regulating see S. Breyer, Regulation and Its Reform (Cambridge, Mass., 1982), ch. 1; A. Ogus, Regulation: Legal Form and Economic Theory (Oxford, 1994), ch. 3; E. Gellhorn and R. J. Pierce, Regulated Industries (St Paul, Minn., 1982), ch. 2; J. Kay and J. Vickers, 'Regulatory Reform: An Appraisal', in G. Majone (ed.), De-Regulation or Re-Regulation? (London, 1989); B. Mitnick, The Political Economy of Regulation (New York, 1980), ch. 5; C. Sunstein, After the Rights Revolution (Cam- bridge, Mass., 1990), ch. 2; C. Hood, Explaining Economic Policy Reversals (Buckingham, 1995).

2 See also J. Francis, The Politics of Regulation (Oxford, 1993), ch. 1. '

3 See Gellhorn and Pierce, Regulated Industries, 36-7 and Chapter 15 below. On regulat- ing monopolies generally see C. Foster, Privatisation, Public Ownership and the Regulation of Natural Monopoly (Oxford, 1992), ch. 6; Ogus, Regulation, 30-3; Breyer, Regulation and

Its Reform, 15-19; Francis, Politics of Regulation, ch. 3; E. Gellhorn and W. Kovacic, Antitrust

Law and Economics CSt Paul, Minn., 1994), chs. 3 and 4.

10 Why Regulate?

• a single seller occupies the entire market;

• the product sold is unique in the sense that there is no substitute sufficiently close for consumers to turn to;

• substantial barriers restrict entry by other firms into the industry and exit is difficult.

Where monopoly occurs, the market 'fails' because competition is defi- cient. From the public interest perspective, the problem with a firm occupy- ing a monopolistic position is that in maximizing profits it will restrict its output and set price above marginal cost. It will do this because if it charges a single price for its product, additional sales will only be achieved by lowering the price on the entire output. The monopolist will forgo sales to the extent that lost revenue from fewer sales will be compensated for by higher revenue derived from increased price on the units still sold. The effects of monopoly, as compared to perfect competition, are reduced output, higher prices, and transfer of income from consumers to producers.

One response to potential monopolies is to use competition (or anti- trust) laws so as to create a business environment conducive to competi- tion. Where a 'natural monopoly' exists, however, the use of competition law may be urideeirable." A natural monopoly occurs when economies of scale available in the production process are so large that the relevant market can be served at the least cost by a single firm. It is accordingly less costly to society to have production carried out by one firm than by many. Thus, rather than have three railway or electricity companies lay- ing separate networks of rails or cables where one would do, it may be more efficient to give one firm a monopoly subject to regulation of such matters as prices and access to the network. Determining whether a natural monopoly exists requires a comparison of demand for the prod- uct with the extent of the economies of scale available in production. If .. a firm is in a position of natural monopoly then, like any monopoly, it will present problems of reduced output, higher prices, and transfers of wealth from consumers to the firm. Restoration of competition by use of competition law is not, however, an appropriate response since compe- tition may be socially costly and thus regulation of prices, quality, and output as well as access may be called for. The regulator will try to set price near incremental cost (the cost of producing an additional unit) in order to encourage the natural monopolist to expand its output to the level that competitive conditions would have induced.

Not all aspects of a supply process may be naturally monopolistic. As Ogus points out," the economies of scale phenomenon may affect

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