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Understanding Price Behavior in Economics and Regulation

Explore the vital relationship between prices and regulation, including suspect behaviors, natural monopolies, rate-making goals, and historical shifts in regulation and economics. Gain insights into pricing dynamics, monopoly power, and rate setting principles.

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Understanding Price Behavior in Economics and Regulation

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Presentation Transcript

  1. ECO 435 – Introduction and Overview David Loomis

  2. Four Categories of Suspect Behavior • Prices “too high” reflecting monopoly power • Prices “too low” implying predatory pricing • Prices “too high” for some and “too low” for others – undue discrimination • Prices “unstable” making it difficult for producers and consumers to plan ahead

  3. Five Characteristics of Natural Monopoly Products • Capital-intensive – high fixed costs • Viewed as necessities – essential to community • Non-storable – subject to fluctuating demand • Produced in favored locations – yielding rents • Direct connections with customers

  4. Eight Traditional Rate-making Goals • Simplicity and public acceptance • Freedom from controversy • Revenue sufficiency • Revenue stability • Stability of rates • Fairness is apportionment of total costs • Avoidance of undue rate discrimination • Encouragement of efficiency

  5. History • 1970s: Regulation and Economics Diverge – OPEC • 1980s and 1990s: Natural Gas Deregulation FERC 436 and 636 • 1990s to present: Electric Deregulation Comes of Age

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