l Regulators try to control the number of firms in the industry.
Entry regulation:
l entry by new firms may be controlled (public utilities)
l entry by existing regulated firms.
l Exit is forbidden without government permission.
9chapter
An industry is a natural monopoly if the production of a particular good or service by a single firm minimizes cost.
The firm can supply a good or service to the entire market at a smaller cost than two or more firms could do.
Various alternatives were proposed to correct the natural monopoly inefficiency:
Doing nothing
Ideal pricing solution
Competition among bidders for the right to the monopoly franchise
Actual regulation
Public enterprise
Ideal – operating in public interest
Linear pricing implies buyers pay a single price for unit of consumption.
Non linear pricing – two-part tariff, which consists of fixed amount of fee + a price per unit
Rate Regulation
Socially Optimum Price
P = MC
Fair-Return Price
P = ATC
Dilemma of Regulation
Public enterprise – government ownership or operation of the monopoly.
Supervisory functions
1) control over activities of subjects of natural monopolies with respect to compliance with the legislation;
2) Conducting inspections of activities of subjects of natural monopolies;
3) examination of cases on administrative violations of the legislation of the RK On natural monopolies at its own initiative on the basis of messages from mass media, on the basis of written statements and messages from state bodies, individuals and legal entities;
4) issuance of instructions in case of violation of the legislation of the Republic of Kazakhstan;
5) license control;
The following serves as grounds to conduct ad hoc inspections of natural monopolies :
1) confirmed facts presented in messages from individuals and/or legal entities;
2) information from state bodies;
3) messages from law enforcement bodies;
4) joint inspections with other state bodies;
5) own initiative of the authorized body;
6) messages in mass media.
The regulatory body examines cases on administra-tive violations of the legislation of the RK:
Upon its own initiative
On the basis of information from mass media
Other materials that are at its disposal, on the basis of written applications and messages from state bodies, individuals and legal entities
11chapter
Two alternative policies to induce the firm to price in a socially efficient manner:
To establish a regulatory agency that sets price and constrains the firm to earn a normal rate of return
The problems with this approach are:
The regulatory agency lacks the necessary information to make effective pricing decisions;
The profit constraint may lead the regulated firm to produce inefficiently
- a reduced incentive to adopt cost-reducing innovations, as additional profits earned cannot be fully retained by the firm
To auction off a franchise to the firm that proposes the lowest price for service
- ideally, this scheme solves all problems because the franchise owner has every incentive to produce efficiently and competition at the bidding stage results in socially optimal pricing
Franchise bidding – issuing the franchise to the firm that proposes the lowest price for service while meeting certain criteria concerning quality of service
It substitutes competition at the bidding stage for regulation
Prices are fixed è incentives to be efficient
If no active competition at renewal time, society may eventually face with a traditional problem of regulation
How to measure the performance of a public enterprise:
Price
Attributes of output (e.g. reliability of the service provided, an electric utility without blackout
The reason why public firms discriminate less:
More uniform pricing schedules reduce the alienation of consumer groups ans this tends to increase political support
Easier to handle
12chapter
Social regulation -- Government-imposed restrictions designed to discourage or prohibit harmful corporate behavior (such as polluting the environment or putting workers in dangerous work situations) or to encourage behavior deemed socially desirable.
Agencies: Environmental Protection Agency, Consumer Product Safety Commission, Occupational Health and Safety Administration, Nuclear Regulatory Committee,
1. Externalities and public goods
2. Value of Life
3. Environmental Regulation
4. National Markets for Clean Air
5. Workplace safety
6. Regulation of Pharmaceuticals
7. others
An externality exists when one or more economic agents undertake an activity that affects the welfare of other economic agents.
Result: markets with externalities are no longer efficient and government regulation is required.
Potential Solutions to Externalities
1.Complete Prohibition.
2.Command and Control (e.g. nuclear radiation).
3.Taxes and subsidies
(e.g. landfill waste)
4.Direct action/government ownership.
Solutions to Free Riding
Government provision. However how does the government decide to produce public goods.
Local government may be better at knowing local preferences for local public goods.
Marginal-cost-marginal-benefit rule
Allocate government resources to maximize net benefit
Social regulation in Kazakhstan
Social regulation deals with issues of unemployment, social protection of society, environmental pollution, health and safety of population
Agencies: Ministry of labor and social protection, Ministry of Environment Protection, State National Center for payment of pensions, etc
Unemployment is the failure to use all available economic resources to produce desired goods and services; the failure of economy to fully employ its labor force.
Unemployment rate is the percentage of labor force unemployed at any time
13chapter
Effective environmental regulation is integral to successful markets, an essential ingredient of a modern economy.
Unregulated markets would be chaotic, unfair and unlikely to deliver what people want – safe, reliable products and a clean environment in which to live and work
Basic regulatory instruments
Command and Control
Economic Incentives
Taxes (fees)
Subsidies
Liability
Permits
At the local level an akimats and Oblast Departments of the Ministry perform the environmental management functions.
The Committee for Forestry, Fishing and Hunting of the Ministry of Natural Resources and Environmental Protection
The RK Agency on Land Resource Management of the Ministry of Natural Resources and Environmental Protection
The Committee for Water Resource of the Ministry of Ministry of Natural Resources and Environmental Protection
The Committee for Geology and Mineral Resources Conservation of the Ministry of Natural Resources and Environmental Protection.
14chapter
The producer’s environment is governed by three sets of influences:
The market through consumer behavior
Government regulation
through design standards that influence the technology or by addressing observed product defects
Tort liability
Operates ex post facto
Main mechanisms influencing Product safety
Consumer’s potential for muting safety device benefits
The “Lulling effect”
Effect of consumer’s perception on safety device efficacy
A group-based pricing
Such a group-based pricing provides a disincentive for firms at the high end of the market
because their safety efforts will not be rewarded.
They will be sharing the benefits of safety with all of the other firms in the market
Economic mechanisms:
Providing warranties
Informational efforts such as ratings provided by government agencies and by consumer groups
ISO
ISO has developed over 19 000 International Standards on a variety of subjects and more than 1000 new ISO standards are published every year.
ISO 14001:2004 Environmental management systems
ISO 26000:2010 Guidance on social responsibility
ISO 31000:2009 Risk management -- Principles and guidelines
ISO 9001:2008 Quality management systems
ISO 9001 and ISO 14001 are among ISO's most well known standards ever.
They are implemented by more than a millionorganizations in some 175 countries.
ISO 9001 helps organizations to implement quality management.
ISO 14001 helps organizations to implement environmental management.
ISO 9001 is for quality management.
Quality refers to all those features of a product (or service) which are required by the customer.
Quality managementmeans what the organization does to
ensure that its products or services satisfy the customer's quality requirements and
comply with any regulations applicable to those products or services.
Quality management also means what the organization does to
enhance customer satisfaction, and
achieve continual improvement of its performance.
ISO 14001 is for environmental management. This means what the organization does to:
minimize harmful effects on the environment caused by its activities,
to conform to applicable regulatory requirements, and to
achieve continual improvement of its environmental performance.
ISO 9001 and ISO 14001 are genericstandards.
Generic means that the same standards can be applied:
to any organization, large or small, whatever its product or service,
in any sector of activity, and
whether it is a business enterprise, a public administration, or a government department.
Management systemmeanswhat the organization does to manage its processes, or activities in order that
its products or services meet the organization’s objectives, such as
satisfying the customer's quality requirements,
complying to regulations, or
meeting environmental objectives
ISO 9001 gives the requirements for what the organization must do to manage processes affecting quality of its products and services.
Doing nothing
More uniform pricing schedules reduce the alienation of consumer groups ans this tends to increase political support
through design standards that influence the technology or by addressing observed product defects