Price Regulation with Ex Post Compensatory Supply

Consider the problem of regulating supply of a homogeneous good in a market with more than one supplier and a large number of buyers. When prices are regulated and set under conditions of imperfect information and uncertainty supply and demand will almost never be equal ex post. In order to correct for this potential disequilibrium under price regulation it may be possible to operate a compensating or residual supplier which automatically adjusts its output such as to clear the market ex post. This type of regulatory mechanism is compared to two other alternatives: (i) using production quotas to control supply and setting prices to consumers ex post such as to clear the market; (ii) setting one price (ex ante) to suppliers and another price (ex post) to consumers. Explicit indices of the relative performance of the alternative regulatory mechanisms are derived and their properties discussed.