Sugata Bag  ::  Course 608 : Economics of Regulation

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Reading & Lecture Notes

Course Outline                                                    [[PDF here]]

Regulatory Economics

1) Role of Government. Introduction to the course. The making of a regulation. Possible instrument choices. Why one instrument over another? Social Cost Benefit Analysis. Consequences of regulation.
Read: VVH Chapters 1,2 and 4.

2) Introduction to Economic Regulation. Motivation behind economic regulation. Potential instruments for regulation. Goals of regulation. Historic background.
Read: VVH Chapter 10. , JOS (pp. 34-53)

3) Theories of regulation: normative and positive analysis, interest groups theory
*VVH Chap 4
Posner , R. A. 1974 ” Theories of Regulation” , Bell Journal of Economics and Management Science, 25 (1), Spring, pp. 335- 373.
Stigler, J. G. 1971, “The Theory of Economic Regulation,” Bell Journal of Management Science, 2 (1), Spring, pp. 3 – 21.
Peltzman, S. 1989 “The Economic Theory of Regulation after a Decade of Deregulation,” Brookings Papers on Economic Activity: Microeconomics, pp. 1 – 41.
Becker Gary S. “A Theory of Competition Among Pressure Groups for Political Influence,” The Quarterly Journal of Economics, Vol. 98, No. 3 (Aug 1983), 371-400

4) Public Enterprise. The origins of public ownership as a way to regulate economic activity. Public vs Private ownership. Does the threat of nationalization/municipalization discipline private firms?
VVH Chapter 14.
Willner (2004)
Vickers and Yarrow (1988)

5) Regulating Natural Monopolies:
(a) Pricing strategies, Rate Structure (RoR, RPI-X), Peak load pricing. Consequences: Averch-Johnson effect. Electric Power Example.

VVH Chapter 11, 12. ; JOS (pp. 76-93; 96-119)
Baumol W. J. and D. F. Bradford, 1970, “Optimal Departures from Marginal Cost Pricing,” American Economic Review, Vol. 60, No. 3, pp. 265-83.
Ramsey, 1927, “A Contribution to the Theory of Taxation,” Economic Journal, Vol. 37, No. 1, pp. 47-61.
AS-03: Section 3.2.4 Choice of ‘X’ in Price Cap Regulation (pp. 59-60); Sections 3.4 (pages. 63-67); Section 4.1 (pages. 71-75)
Frank Mark W. “An Empirical Analysis of Electricity Regulation and Technical Change in Texas,” Review of Industrial Organization. Vol 22, No. 4 (Jun 2003) 313-331
Averch. H., and L. L. Johnson, 1962, “Behavior of the Firm under Regulatory Constraint” ,American Economic Review, Vol. 52, No. 5, pp. 1053-1069

(b) Sustainability of natural monopolies and contestability
 VVH Chap 11; JOS (pp.7-31)
Baumol, W. and R. Willig 1981 ” Fixed Costs, Sunk Costs, Entry Barriers and Sustainability of Monopoly “, Quarterly Journal of Economics, 95, August, 405-431

6) Regulating Natural Monopolies (Under Asymmetric Information):Problems of natural monopoly and Conventional theory of regulatory policy solutions (including optimal policies).
Read: *VVH, Chapters 10 and 11., JOS(pp.120-153)
*Baron-Myerson (1992)
*Laffont, JJ. and Tirole, J. (1993). A Theory of Incentives in Procurement and Regulation. Introduction Chapter.
* Two Hand-outs on Hidden Info and Moral Hazard Models in monopoly set.
*AS-03: Upto 2.2.2 (pp. 1-24) & Section: 2.4 (pp. 35-40)
Demsetz, H., “Why Regulate Utilities?”, Journal of Law and Economics, 1968, pp. 55-65.

7) Franchise Bidding: The Case of Cable Television. Using franchise bidding as an alternative to regulation in the case of a natural monopoly.
* VVH Chapter 13. ; JOS (65-70)
AS-05: pp 24-29   Or, AS-03: Section 4.2 (pp. 76-80)

8) Regulation of Innovation & Patents.
Read: VVH chapter 24.

9) Auction design and spectrum allocation in telecommunications
*Klemperer: Auctions: Theory and Practice (2005). Chapter 1 (only Sec 1 and 4); and Chapter 5 . It is available online at

10) Various topics of contemporary interest
*Stigliz Jospeh E., Andrew Wiss (1981). “Credit Rationing in Markets with Imperfect Information”. American Economic Review Vol 71 No. 3 393-410 ii.
*Dixit Avinash (2009). “Governance Institutions and Economic Activity.” American Economic Review Vol. 99 No. 1: 5-24. iii.
**Adams William, Liran Einav and Jonathan Levin (2009) “Liquidity Constraints and Imperfect Information in Subprime Lending.” American Economic Review Vol. 99 No. 1: 49-84 iv.
**Coval Joshua D. Jakub W. Jurek and Erik Stafford (2009) . “Economic Catastrophe Bonds.” American Economic Review Vol. 99No. 3: 628-666



(1). Dynamic Issues in Natural Monopoly Regulation: Telecommunication Example. What should a regulator do when an industry transforms over time due to exogenous changes that can either (1) change the optimal price or (2) change the industry from a natural monopoly into “something else”?
Read: VVH Chapter 15.

(2). Dynamic Issues in Natural Monopoly Regulation: Telecommunication Example 2. The regulation of wireless telephony. Importance of common standards. Lessons from European Spectrum Auctions.
Read: Klemperer, P. (2002), How (not) to run auctions: The European 3G telecom auctions, European Economic Review, Vol.46, No.4-5, pp.829-845.

(3). Regulation of Energy Markets : Crude oil & Natural Gas.
Read: VVH Chapter 18.

(4). Problems of regulation: The case of UK Railway Privatisation. Background to the restructuring. Regulatory changes and problems. Assessing the effects. Possible remedies.
Read: Pollitt, M.G. and Smith, A.J. (2002) The Restructuring and Privatisation of British Rail: Was it really that bad?, Fiscal Studies, Vol.23, No.4, pp.463-502.

(5). Problems of regulation 2: The Case of Californian Electricity Deregulation. The nature of the reforms in California. How regulatory failure occurred. The costs of regulatory failure. Lessons for deregulation.
Read: Joskow, P. (2001), “California’s electricity crisis.” Oxford Review of Economic Policy, 17(3): pp.365-388.


Term Paper Topics

  1. Regulation of Energy Market
    1. Regulating Petroleum Product Prices
    2. Rent Control and Natural Gas Field Prices
    3. Electricity Market (Production Cost, Price, Subsidy) Regulation
  2. Regulation of Transport
    1. Urban Public Transport (taxi, Trucking)
    2. Competition Airline regulation (Price Controls, Route Award, Supporting State owned Airline, Occupancy)
  3. Regulation of Telecom
  4. Regulation of Pharmaceuticals
  5. Regulating Urban Piped Water Market

Or any other topic that is relevant to the course