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Two Proposals to Improve Price-Cap Regulation

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  • Robert D. Cairns
  • Anthony G. Heyes

Abstract

Under price-cap regulation, economic gains can be unlocked by permitting "trades" which do not make consumers worse off. We propose a simple method for "refereeing" such trades, based on compensating variation and utilizing Fisher's ideal price index. It is theoretically preferred to the Laspeyres indices used in price-cap regulation, but requires a small amount more effort. The method can be extended, in a natural way, by computing one or both of two adjustments for nonhomotheticity of preferences and for welfare or political weights. These considerations are important in reality, but either extension would require considerably more effort.

Suggested Citation

  • Robert D. Cairns & Anthony G. Heyes, 2004. "Two Proposals to Improve Price-Cap Regulation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 160(2), pages 243-251, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200406)160:2_243:tptipr_2.0.tx_2-x
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    References listed on IDEAS

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    2. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, November.
    3. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    4. Baumol, William J & Bailey, Elizabeth E & Willig, Robert D, 1977. "Weak Invisible Hand Theorems on the Sustainability of Multiproduct Natural Monopoly," American Economic Review, American Economic Association, vol. 67(3), pages 350-365, June.
    5. Feldstein, Martin S, 1972. "Distributional Equity and the Optimal Structure of Public Prices," American Economic Review, American Economic Association, vol. 62(1), pages 32-36, March.
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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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