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1423class5 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± Class 5 1
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Outline • Instruments of Regulation • History of Regulation in the US • Overview of process of regulation • Theories of Regulation • Theory of Natural Monopoly • Pricing under Monopoly • Conclusions 2
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Regulation • A definition: ‘A government imposed limitation on the behavior of individuals or organizations.’ e.g. minimum wage restrictions, pollution targets and information requirements. 3
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Instruments of Regulation • Control of price – This aims to prevent both predatory pricing and over charging. • Control of quantity – Universal service obligations, maximum production limits. • Control of entry – e.g. in long distance telecoms and NYC taxicabs • Control of quality – e.g. of emissions, customer service levels, safety etc. 4
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History of Regulation Religious leaders have restricted the price of credit and discussed ‘Just Prices’ (e.g. Aquinas) Modern economic regulation begins in 1870s with regulation of water and gas rates. In US case law develops scope for regulatory action. 5
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History of Regulation • Munn v. Illinois (1877) – 1871 Illinois sets a ceiling on rates for grain elevators – Munn and Scott claim law deprives them of private property without due process (5 th amendment). – Ruling establishes public interest defense for regulation of private property. • Interstate Commerce Act of 1887 – Railroads affected by high prices with periodic price wars. – Act establishes Interstate Commerce Commission (ICC) to regulate railroad rates. 6
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• Nebbia vs New York (1934) – NY regulating price of milk – Nebbia undercuts price of milk and is sued. – Claimed that: 1. Market is competitive, 2. Market is not a utility, 3. Due process violated. – Court ruled: 1.& 2. Yes; 3. No. – This establishes that any industry can be regulated. MA was regulating utilities in 1885 and by 1930 most states had Public Service Commissions. 7
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1423class5 - 14.23 Government Regulation of Industry Class...

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