Price Caps, Rate of Return Constraints and Universal Service Obligations

Pio Baake

Journal of Regulatory Economics, 2002, vol. 21, issue 3, 289-304

Abstract: This paper evaluates the effects of modifying price cap regulation when firms are allowed to use non-linear tariffs. We consider a stylized network industry and analyze price cap regulation combined with rate of return regulation and with a universal service obligation. While both modifications can increase aggregate welfare by reducing the pricing distortions under price cap regulation, a universal service obligation is welfare superior if the firm's profits and the size of its network are held constant. Copyright 2002 by Kluwer Academic Publishers

Date: 2002
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