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How should Utilities be Regulated Introduction The utility sector includes telecommunications energy and water supply Utilities usually operate as regulated local monopolies The question that arises is why and how the industries that produce these goods and services are regulated Do the regulations work in the public interest or do they serve special interests the interests of particular groups of consumers or producers A The Scope for Regulation The Cost Of Monopoly When market price rises above the competitive level consumers who continue to purchase the sellers product at the new higher price suffer a loss Figure 1 Appendix 1 exactly offset by the additional revenue that the sellers obtain at the higher price Those who stop buying the product suffer a loss D not offset by gain to the sellers This is the deadweight loss from supracompetitive pricing and in traditional analysis its only social cost L being regarded merely as a transfer from consumers to producers Loss D however underestimates the social costs of monopoly The existence of an opportunity to obtain monopoly profits will attract resources into efforts to obtain monopolies and the opportunity costs of those resources are social costs of monopoly too Tullock 1967 The transfer of wealth from consumers to the producers involves no artificial limitation of output but it does not follow that the social cost of production is zero The opportunity for such transfers draws resources into thieving and in turn into protection against theft and the opportunity costs of the resources consumed are social costs of theft Losses Due to Monopoly Private and government utilities in many countries are still under monopoly or oligopoly Over the last two decades there has been a world trend of market liberalization and privatization of the utility sector The energy and water industries of many countries have been privatized and competition has replaced monopoly in these industries
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