Monopoly regulation with non-paying consumers

Abstract

This article studies the effects of delegation in a monopoly regulation context. A regulator, with welfare maximization objectives, fixes the price level and makes transfers to a monopolist who faces non-paying consumers. In a Full Information scenario, the regulator not only chooses the price and the transfers so as to maximize the social welfare, but is also able to decide the optimal investment in a costly anti-evasion technology. This situation, however, is unrealistic since usually the firm's know-how is required in order to undertake a successful investment. Therefore, under this context the best the regulator can do is to delegate the investment decision to the firm and try to induce high investment. It is shown that under certain conditions, delegation not only implies a lower level of anti-evasion technology, but also a lower price level than what is socially optimal. We show that this is true for different specifications of the firm's utility. Comparative statics exercises are done in the main exogenous parameters of the model.