feb 14, 1900 - Problems with Industrial Regulation

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The two main problems with industrial regulation is that the firms tend to be X-inefficient, and it sometimes perpetuates monopoly long after the conditions of natural monopoly have ended.

The regulated firm has little or no incentive to reduce its operating costs because the regulatory commission would eventually confine the firm to a normal profit or a “fair return” on the value of its assets. Furthermore, because the regulatory commission must allow the public utility a fair return, the monopolist can simply pass through higher production costs to consumers by charging higher rates. Industrial regulation fosters considerable X-inefficiency. The second problem is shown when commissions protect the regulated firms from new competition by either blocking entry or extending regulation to competitors. Industrial regulation therefore may perpetuate a monopoly that is no longer a natural monopoly and would otherwise erode.

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