The Economics of Regulation: Principles and Institutions

By Daniel, Coldwell,, III | Atlantic Economic Journal, September 1990 | Go to article overview

The Economics of Regulation: Principles and Institutions


Daniel, Coldwell,, III, Atlantic Economic Journal


The Economics of Regulation: Principles and Institutions

I. The Reprint of a Classic

In his Foreword [p. xi], Paul Joskow correctly describes this 1988 reprint of Alfred Kahn's two-volume treatise. The Economics of Regulation [1970, 1971], as being a classic in the literature on the economics of regulation. Kahn's approach to the subject is remarkably comprehensive, incredibly detailed, and consistently engaging intellectually. Kahn rightly faults almost all regulatory policies, practices, and outcomes that occurred prior to 1970.

In the introduction [pp. xxxii-vii], he is extremely critical of the partial deregulation that has since occurred. He nevertheless concludes that [II, p. 108] "...by thinking and trying, it [regulation] can be made to make more of a difference--or, more importantly, a better difference." Kahn thinks that what is needed is: (1) to make [II, p. 112] "... regulation more intelligent and more effective in those circumstances in which competition is simply infeasible;" and (2) to find [p. xxxvii] "... the best possible mix of inevitably imperfect regulation and inevitably imperfect competition." According to Kahn, economic analysis should, and must, play an important role in accomplishing these objectives.

The reprint, which is actually in one volume, retains the original two-volume format. The first volume develops and applies the [p. i] ". . . guiding principles [which] define the goal of economic efficiency and provide rules for achieving it." The second volume deals with the major institutional issues regarding [p. i] "... the relations between various institutional arrangements--market structures, systems of incentives, laws and administrative procedures--and economic performance." His objective is [p. i] "... to join neoclassical theory with `institutional economics'."

Kahn's approach in this regard is consistent with that of classical political economy. Its subject matter consists of describing the working properties of alternative systems of constraints on economic behavior. The purpose is to select from among possible economic systems, i.e., institutional arrangements, the one that works best [Vining, 1956]. It is interesting to note that, in this way, all economists are institutionalists more or less and necessarily so [Daniel, 1970, 1971; Hill, 1971; Ayres, 1971].

The following two sections describe the contents of Kahn's book.

II. Economics of Regulation, Volume I

Volume I consists of two parts. In the first part, Kahn defines regulation as direct governmental control over entry, price, and conditions or quality of service. Initially, a public utility is defined as an industry (market) that is regulated; but, later, public utility industries are identified in which regulation is incomplete. Market systems actually may be classified in accordance with a continuum of degrees of intervention, management, or control. Each class of markets would then correspond to a particular institutional arrangement for performing the functions of an economic system. Kahn's virtual dichotomization of markets systems into those that are free and competitive and those that are regulated leaves no doubt that these are the only two types of markets that are acceptable to him as arrangements for social control.

The commitment to a private enterprise system suggested thereby does not preclude a tolerance of publicly owned utilities, however, since later he states that [II, p. 104] ". . . there is strong evidence in the public utility arena that competition between the two [public and private enterprise] systems of organization, like competition among private businesses, is highly conducive to improved performance." In any event, as society's surrogate for free competitive markets, regulated markets should generate results that conform to the optimum economic results of a free competitive market, according to Kahn.

Chapter 3 identifies and explains marginal cost pricing as the central economic regulatory principle. …

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