10.1 Signposting

Question 1

What are the different regulation types?

Answer 1

• Price Regulation (Numerous Types)
• Quality control or performance targets
• Profit control or ‘rate of retun’ regulation
• Windfall taxes on Monopoly Profits
• Merger Policy

Question 2

Different types of price regulation?

Answer 2

• RPI Price Regulation
• RPI-X Regulation
• RPI +/- k regulation

Question 3

Positive Evaluation Points for price regulation

Answer 3

• Price regulation of any sort encourages firms to find efficiency savings

Question 4

Negative Evaluation Points for price regulation

Answer 4

• Regulatory bodies may set the level of X and K wrongly. Due to imperfect information
• Regulation is very costly in maintaining the existence of regulatory bodies and in both
  administration and enforcement of regulation
• Firms may be punished for successfully adapting to the regulation
• Regulatory capture could occur.

Question 5

Negative Evaluation Poits for Quality Control and Performance Targets

Answer 5

• Strict performance targets can lead to unintended consequences
• Strict performance targets can also lead to firms ‘Gaming’ the system and finding ways
  around the regulation

Question 6

Negative Evaluation Points for profit control or ‘Rate of Return’ Regulation

Answer 6

• Such profit regulation requires regulators to have perfect knowledge of costs and revenues of the monopolist. (Asymmetric info)
• Profit regulation promotes the wrong incentives for a firm who will not control their costs knowing that costs will always be covered by the profit control equation.
• Profit regulation will incentivise firms to over employ capital even it is not necessary and not a worthwhile investment for the firm

Question 7

Negative Evaluation Points for Windfall Taxes

Answer 7

• Taxation will increase marginal costs for monopolists, resulting in even higher prices and lower quantities at the profit maximising level
• Taxes on monopoly profit promotes tax evasion and tax avoidance behaviour where firms find loopholes in the tax system to avoid paying full tax or they simply under report the level of profit made to evade paying taxes.
• Taxing monopoly profit can reduce significant dynamic efficiency gains