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Regulating Infrastructure: Monopoly, Contracts, and Discretion
In the 1980s and ’90s many countries turned to the private sector to provide infrastructure and utilities, such as gas, telephones, and highways―with the idea that market-based incentives would control costs and improve the quality of essential services. But subsequent debacles including the collapse of California’s wholesale electricity market and the bankruptcy of Britain’s largest railroad company have raised troubling questions about privatization. This book addresses one of the most vexing of how can government fairly and effectively regulate “natural monopolies”―those infrastructure and utility services whose technologies make competition impractical?
Rather than sticking to economics, José Gómez-Ibáñez draws on history, politics, and a wealth of examples to provide a road map for various approaches to regulation. He makes a strong case for favoring market-oriented and contractual approaches―including private contracts between infrastructure providers and customers as well as concession contracts with the government acting as an intermediary―over those that grant government regulators substantial discretion. Contracts can provide stronger protection for infrastructure customers and suppliers―and greater opportunities to tailor services to their mutual advantage. In some cases, however, the requirements of the firms and their customers are too unpredictable for contracts to work, and alternative schemes may be needed.
Rather than sticking to economics, José Gómez-Ibáñez draws on history, politics, and a wealth of examples to provide a road map for various approaches to regulation. He makes a strong case for favoring market-oriented and contractual approaches―including private contracts between infrastructure providers and customers as well as concession contracts with the government acting as an intermediary―over those that grant government regulators substantial discretion. Contracts can provide stronger protection for infrastructure customers and suppliers―and greater opportunities to tailor services to their mutual advantage. In some cases, however, the requirements of the firms and their customers are too unpredictable for contracts to work, and alternative schemes may be needed.
- GenresNonfiction
448 pages, Paperback
First published September 15, 2003
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December 28, 2009
In this book Gomez-Ibanez examines everything from the Sri Lankan bus system to electricity transmission in Argentina to discover some universal lessons of utility regulation.
One of the first, somewhat disappointing, revelations is that every case is distinct, and that it is difficult if not impossible to design coherent regulatory systems that answer all contingencies. Even the much celebrated British water "price cap" regulations (which allow utilities to keep gains from productivity) have been subject to political gamesmanship, utility collusion, and simple poor planning. Britain's railroad privatization unraveled because of a slight under-pricing of congestion charges which caused passenger trains to overburden the tracks.
Gomez-Ibanez does show that privatization works, and that even much derided deregulation schemes (like Britain's railroads and United States airlines) have led to massive productivity and consumer gains. But surprisingly for a free-market economist, he also demonstrates how there is simply no negotiating around the high-transaction costs and economies of scale that cause the vertical integration of utilities in the first place, so there will always be a need for regulation. He also shows how the success of those regulations turns on such simple but intractable problems as how much to charge freight and passenger lines for the construction of elevated banked rail tracks. Since every industry has many such specific techniques and practices there is no simple universal solution, economists and policymakers will be fretting over these issues for a long time to come.
Some of these case studies have been told better elsewhere (see Martha Derthick's The Politics of Deregulation) but the scope of this book is broader and it provides a useful overview of the modern theory and the practice of regulation.
One of the first, somewhat disappointing, revelations is that every case is distinct, and that it is difficult if not impossible to design coherent regulatory systems that answer all contingencies. Even the much celebrated British water "price cap" regulations (which allow utilities to keep gains from productivity) have been subject to political gamesmanship, utility collusion, and simple poor planning. Britain's railroad privatization unraveled because of a slight under-pricing of congestion charges which caused passenger trains to overburden the tracks.
Gomez-Ibanez does show that privatization works, and that even much derided deregulation schemes (like Britain's railroads and United States airlines) have led to massive productivity and consumer gains. But surprisingly for a free-market economist, he also demonstrates how there is simply no negotiating around the high-transaction costs and economies of scale that cause the vertical integration of utilities in the first place, so there will always be a need for regulation. He also shows how the success of those regulations turns on such simple but intractable problems as how much to charge freight and passenger lines for the construction of elevated banked rail tracks. Since every industry has many such specific techniques and practices there is no simple universal solution, economists and policymakers will be fretting over these issues for a long time to come.
Some of these case studies have been told better elsewhere (see Martha Derthick's The Politics of Deregulation) but the scope of this book is broader and it provides a useful overview of the modern theory and the practice of regulation.
Displaying 1 of 1 review