The Economic Regulation of Private Industries by Price Constraints

Abstract

Regulation of some newly privatised industries in the UK has been implemented by restricting annual price increases. This paper analyses the two forms which such regulation has taken-the tariff basket approach (applied to British Telecom) and the average revenue constraint imposed upon British Gas and the British Airports Authority. The incentives given by the tariff basket constraint to a profit maximiser are likely to result in a more efficient price structure than would occur under an average revenue constraint, demonstrating that the former is generally a superior form of regulation.

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