Abstract
The theory of public utility pricing provides clear recommendations when the regulator and utility have same information about the underlying economic environment – the structure of demand and the production process. In reality, the utility has private information about the underlying economic environment, and the incentives created by the regulatory process can cause it to exploit this information by producing in an inefficient manner. This insight complicates virtually all aspects of the theory of public utility pricing, and has led to theoretical characterizations of the public utility price-setting process as the solution to a mechanism design problem.
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Wolak, F.A. (2018). Public Utility Pricing and Finance. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2268
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DOI: https://doi.org/10.1057/978-1-349-95189-5_2268
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