Quality of Government Regulated Goods

Marian Moszoro
2010 Social Science Research Network  
Regulators face the difficult task of determing the area for right combinations of price and quality of government regulated goods. While the monopolist maximizing profits always produces less in quantity than they would produce in a free competitive environment, the level of quality produced by this monopolist is not unequivocal: it depends on the costs function and demand changes. The social effect of quality change is not unequivocal, either, because it depends, apart from the costs
more » ... the costs function, on the direction and degree of change of the demand curve tilt. The problem lies in the fact that we cannot determine how the price elasticity of basic need goods will change with the change of quality level, or whether this change of quality is socially desired. This paper analyzes qualitywhich is often treated as constant or exogenousas a decision variable in the government regulated goods sector. Because the quality of government regulated goods reminds an externality, in particular cases the optimal level of the quality of these goods can be determined. Paradoxically, regulators introducing prices to guarantee a minimum return on investment may even make it impossible to achieve Pareto effective contracts for government regulated goods. JEL classification: H54, L15, L51
doi:10.2139/ssrn.1729646 fatcat:w44i3ogpijgjfbv652cvq33piy