Contributions of Neoclassical Economics to Public Utility Analysis

Abstract

Neoclassical economics, the dominant economics paradigm, has influenced and been influenced by developments in regulated industries. We identify major theoretical and empirical accomplishments, discuss the impact ofthese accomplishments onpolicy development, and list the channels through which the impacts are madepossible. We then discuss regulatorypolitics, lack ofresearch perspective, an overly narrow focus on economic efficiency, and the academic profession as factors limiting the impact of neoclassical economics on public policy.

Fairness in Public-utility Regulation: A Theory

“…In rejecting these policies, regulators routinely point to concerns about fairness or equity (see, for example, Kahn 1970;Baumol 1986;Faulhaber and Baumol 1988;Berg and Tschirhart 1995;Raux and Souche 2006). 3 This focus on fairness or equity does not seem to be a recent innovation.…”

EFFECTIVE WATER PRICING1

“…Economic literature pertaining to public utilities (12) has had a longstanding interest in efficient pricing, so it is useful to consider both the overlap and departures of the above water pricing results in relation to the more general literature. Public utility economics has provided many contributions (reviewed by Berg and Tschirhart, 1995), most of which are not directly germane for the objectives of the pricing model set forth above.…”

Liberalization and Regulation of Telecoms, Electricity, and Gas in the United States

“…Martin Glaeser (1927) helped refine the public utility concept and explained the economic and legal rational for regulation, as well as the emerging lessons from experiments in the regulation of prices. James Bonbright and Gardiner Means (1932) provided insights into problems with utility holding companies and Bonbright (1961) wrote a foundational text on utility ratemaking, emphasizing fairness and concrete regulatory issues (Berg and Tschirhart, 1995). The basic postulates of these and other institutionalists were that regulation was needed to control market power, pursue public and social interest goals, improve efficiency and individual choice, and provide due process for stakeholders and operate with transparent processes.…”