Market Failure and Regulatory Reform: Energy and Telecommunication Networks as a Case Study

Abstract

The deregulation of public utilities continues to be a source of controversy and debate. Economic regulation has traditionally been justified on the grounds that the provision of necessary services for all sectors of society at just and reasonable rates requires control of the firm’s ability to set exploitative prices and restrict or denigrate basic service. Proponents of deregulation argue that such regulatory intervention constitutes a barrier to innovation, protectionism for special interests, and a disincentive to minimize the cost of service. Furthermore, they insist that replacing regulation with free markets will force prices toward costs, control excess profits, and sweep aside residual pockets of monopoly power in a grand Schumpeterian manner. However, experience over the past decade has shown that these arguments are seriously flawed. This paper will examine these defects and point to institutionalist oriented reforms.