Decentralized method for utility regulation: a comment

Journal Article · Mon Oct 01 04:00:00 EDT 1979 · J. Law Econ.; (United States)

DOI:https://doi.org/10.1086/466950· OSTI ID:5681948

Sharkey, W W

The author comments on the article by Loeb and Magat in this journal issue (P 399); he feels their idea is worthy of more-detailed examination on an industry-specific level. He confines his comments, however, to a more-general comparison of the Loeb-Magat (L-M) scheme, traditional rate-of-return regulation, and pure franchise bidding. The basic L-M proposal consists of two parts. First it is shown that if a utility is subsidized by an amount corresponding to total consumer surplus, then it will have the incentive to pursue cost-minimizing behavior and to set its price equal to the marginal cost of production. Mr. Sharkey believes that this pure subsidy scheme would be wholly unworkable in practice. The second part of the L-M proposal consists of the subsidy scheme combined with either franchise bidding or a lump-sum tax. Mr. Sharkey feels that this proposal has considerable merit if conditions exist such that the net subsidy paid to the utility is sufficiently small; net subsidy is defined as the excess of the actual subsidy plus revenues of the firm over the total cost of production. Thus, the net subsidy is the excess profit the utility receives compared to a utility perfectly regulated by traditional means. Mr. Sharkey elaborates on some of his objections to the L-M proposal for cases in which the net subsidy is large. Then, he briefly considers the characteristics of a natural monopoly market which could potentially be regulated by a combined subsidy-franchise-tax scheme.

• OSTI ID: 5681948
• Journal Information: J. Law Econ.; (United States), Journal Name: J. Law Econ.; (United States) Vol. 22:2; ISSN JLLEA
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
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MONOPOLIES
PRICES
PUBLIC UTILITIES
RATE STRUCTURE
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