Th3.6: ^^ Price Regulation Flashcards
What can regulation do?
set price controls to force monopolists to charge a price below profit maximising price, using the RPI-X formula
What does X represent in the RPI-X formula?
the expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to consumers
Arguably a better system is…
‘RPI-X+K’ where K represents the level of investment
What does it give an incentive for firms to do?
be as efficient as possible as if they can lower costs by more than X, they will enjoy increased profits
What does price regulation prevent?
prevents excessive prices and ensures that gains are passed onto the customer
What is the problem with price regulation?
it is difficult to know where to set X due to rapid improvement in technology and because any information on what the efficiency gains will be have to come from the firm, who could easily lie as there is asymmetric information - as a result, there may be sudden price falls or rebates for customers
Moreover, what could be set to ensure monopolies are allocative efficient?
maximum prices could be set where the price is equal to the MSC
Why is it difficult for governments to know where to set the price?
as they do not know the exact allocative efficient output
How could it also increase dynamic inefficiency?
as firms are unable to maximise profit so may not invest
