The Economics of Regulation: Principles and Institutions

by Alfred E. Kahn

As Chairman of the Civil Aeronautics Board in the late 1970s, Alfred E. Kahn presided over the deregulation of the airlines and his book, published earlier in that decade, presented the first comprehensive integration of the economic theory and institutional practice of economic regulation. In his lengthy new introduction to this edition Kahn surveys and analyzes the deregulation revolution that has not only swept the airlines but has transformed American public utilities and private industries generally over the past seventeen years. While attitudes toward regulation have changed several times in the intervening years and government regulation has waxed and waned, the question of whether to regulate more or to regulate less is a topic of constant debate, one that The Economics of Regulation addresses incisively. It clearly remains the standard work in the field, a starting point and reference tool for anyone working in regulation.Kahn points out that while dramatic changes have come about in the structurally competitive industries - the airlines, trucking, stock exchange brokerage services, railroads, buses, cable television, oil and natural gas - the consensus about the desirability and necessity for regulated monopoly in public utilities has likewise been dissolving, under the burdens of inflation, fuel crises, and the traumatic experience with nuclear plants. Kahn reviews and assesses the changes in both he is particularly frank in his appraisal of the effect of deregulation on the airlines. His conclusion today mirrors that of his original, seminal work - that different industries need different mixes of institutional arrangements that cannot be decided on the basis of ideology.

614 pages, Paperback

First published February 1, 1971

Reviews

[Ziad Lien · Rating 4 out of 5]

Kind of missed on his take with the airline industry but I’ll let it slide 💔

[Nick Crowley · Rating 3 out of 5]

This is a foundational text in regulatory economics, providing some of the theoretical underpinnings for commonly accepted regulatory mechanism that exist today. Kahn provides broad insight on approaching marginal cost pricing in natural monopolies, discussing drawbacks and remedies in traditional regulation, as well as complicating factors such as competition and varying demand elasticity among customer groups. He draws primarily upon industry experience in regulating railroads and electric utilities, occasionally referencing telecommunications and gas transmission.

One key takeaway among many: "load is always on the margin." No consumer has a right to the status quo. For example, suppose you lived in Atlanta, Georgia all your life until 1990, when the population began to explode. Suddenly, your relatively empty highways are jam packed with traffic. You argue: "hey, I shouldn't have to pay for improvements. All these newbies should foot the bill. They're the ones causing the congestion." Wrong! Your use of the highway contributes to congestion just as much as anyone else's. You don't get to escape payment just because you got there first. The same is true for electric load.

Another interesting thought: pure marginal cost based pricing for electric capacity would permit super off peak (midnight) consumers to use electricity free of charge. The peak customers are the ones who impose marginal capacity costs.

There's a lot to digest and a lot to build on from this work. I have a lot of respect for Dr. Kahn, who developed the price cap mechanism by which interstate oil pipelines are regulated at FERC. Updating the five year oil price cap index using "the Kahn Methodology" was one of my first projects at the Commission in 2015 and was my introduction to incentive regulation, which has become a pillar in my career as an economist so far.

[Paul J · Rating 3 out of 5]

Don't read this book. I'm only listing it because it proves that I'm a total nerd. I read it. I enjoyed it. I've even picked it up several times hence while enjoying some scotch. I need a hobby.

[Eric · Rating 3 out of 5]

The absolute only reason I would recommend this book is if you must read it. I needed it for work and it served that purpose well. It is dry and very technical, written from an economist that is one of the absolute tops in the field of regulation.