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Regulation: Is one way in which companies are constrained by law. E.g. Maximum pollution
levels or controlling quantity and quality.
Objectives of regulation
Reduce barriers to entry
Introduce contestable markets
Prevent abuse of monopoly power
Prevent anti-competitive practices
How markets should operate (firms are raising prices by too much)
Set standards for the quality.
Problems with regulation
Monitoring costs Setting up is expensive and running the firms. If it costs more to
run it then to keep and money coming in.
Regulatory capture Risk of Stockholm syndrome
Credibility of the regulators Regulators tell monopolists to invest and they will give
light regulation. However after they have invested they will have the temptation to
increase it again. The monopolist will foresee this and not invest in the first place.
Types of Regulation
RPI X: Permitted price increases are determined by the % rise in RPI minus the amount of
X. X is the reduction in price required for the industry as a result of expected improvements
in efficiency. E.g. Inflations is expected to increase by 8% and the X value here is 4.5%, the
4.5% shows the potential reduction in price due to them being more efficient.
A way of protecting the consumer by instead of just making the consumer pay more than
just charging more without increased efficiency. If they weren't being regulated then prices
would just continue to increase.
Biggest problem of this is X because X will just add to further inflation. X comes from the
firm itself, they may not tell the truth/be accurate. If X is set too high the firms may claim
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they don't have enough funds to continue being efficient. However if X is too low then the
firm will make lots of supernormal profits and be taxed. If X is set at a particular rate for a
time period it will not accurately show changes in the market.
Licencing: E.g. Rail Industry. Companies bid for different times that their trains can go
through. When they bid they give a price proposal, quality and customer service etc.…read more