Forced Freebies: A Note on Partial Deregulation with Pro Bono Supply Requirements

M.P. Schinkel and Jan Tuinstra

No 04-04, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: The liberalization of many former state governed natural monopolies in sectors such as electricity, railroad and telecommunications is done by partial deregulation. Typically, entry is invited into elements of the production chain, yet under strict price and quality controls. This note considers some potential welfare effects of an unconventional type of conditional deregulation, used in the electricity market in Flanders, Belgium, where the utility companies are held to deliver the households they supply a complimentary basic electricity package free of charge. It is shown that, while decreasing the number of new entrants into the liberalized market, such pro bono supply requirements can nevertheless increase net total production. A general condition for a welfare maximizing level of `forced freebies' is derived.

Date: 2004
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