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Impediments

Impediments. Economists Data not available Jurisdictional boundaries limit regulator’s power Regulators must know the following for Ramsey to be an improvement Distortions (when firms price above MC) Degree of interdependence. Complication #1. Goods as inputs

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Impediments

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  1. Impediments • Economists • Data not available • Jurisdictional boundaries limit regulator’s power • Regulators must know the following for Ramsey to be an improvement • Distortions (when firms price above MC) • Degree of interdependence

  2. Complication #1 • Goods as inputs • Price below MC (Lancaster 1979) • When good is an intermediate good such as electricity, and communication • Effects efficiency in the vertical chain

  3. Complication #2 • Asymmetric information (Sappington 1983) • Regulator knows demand and cost structure • Lacks info on a particular technology structure • Can’t pinpoint cost exactly • If price is set too low, firms leave • If price is set too high, excessive profits • Regulator strategy will deviate from Ramsey

  4. Complication #3 • Long-run vs. Short-run • Long-run elasticities > Short-run elasticities • Long-run substitutability must be accounted for • Distorts incentives elsewhere

  5. Real World • Arguments for ROR and against Ramsey and MC are that regulators will never have full info • Advance in technology complicates Ramsey pricing • Often Ramsey is not implemented with transfers – not Pareto superior • Ramsey- not free of subsidies (i.e. low income) • Kamerschen and Keenan • Ramsey is more of a “theoretical curiosity than a workable regulatory rule.” • Ramsey possible when • Output not strongly linked to other sector demand and supply elasticities

  6. Linked elasticities • Strongly linked • No link

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