Working Paper: CEPR ID: DP13801
Authors: David Martimort; Jerome Pouyet; Carine Staropoli
Abstract: We consider the regulation of the tariffs charged by a public utility in the electricity sector. Consumers differ in terms of their demands which are private information. When regulating the firm's tariffs, the government is concerned by redistribution across consumers classes. A conflict between redistribution and screening induces production distortions even when the firm is a monopoly. Introducing competition with an unregulated fringe may improve efficiency but jeopardizes redistribution. In response, the government may now want to manipulate information about the incumbent's cost so as to restrict entry and better promote its own redistributive objective. To prevent such obstacle to entry, the government's discretion in fixing regulated tariffs of the incumbent should be restricted. This can be done by imposing floors or caps on those tariffs and/or by controlling the market share left to the competitive fringe. We highlight the determinants of such limits on discretion and unveil to what extent they depend on the government's redistributive concerns.
Keywords: electricity markets; regulated tariffs; governments; redistributive concerns; optimal discretion
JEL Codes: L51; L94; L98; Q41; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government regulation (L51) | Consumption distortions (D11) |
| Consumption distortions (D11) | Inefficiencies (D61) |
| Government favors low-valuation customers (D49) | Regulated tariffs induce consumption distortions (H31) |
| Regulated tariffs induce consumption distortions (H31) | Marginal prices set below marginal cost (D40) |
| Government favors high-valuation customers (D49) | Overproduction (E23) |
| Overproduction (E23) | Marginal prices above marginal cost (D40) |
| Regulated tariffs (L51) | Systematic bias against competition (L12) |
| Regulated tariffs (L51) | Favoring incumbent and limiting entry (L13) |
| Government's manipulation of information (H12) | Inefficient barriers to entry (L13) |
| Inefficient barriers to entry (L13) | Promoting redistributive objectives (H23) |