Price controls -- typically reviewedevery five years in the United Kingdom -- have beencontroversial. The author traces the development of U.K.price controls and explains that the initial controls forelectricity and water companies, based on underestimates ofthe companies' scope for reducing costs, turned out tobe overly generous, allowing them high profits. While someanalysts have suggested annual profit-sharing regulation,the practical problem is that annual profit-sharing wouldplace a heavy information burden on firms and regulators andwould weaken companies' incentives to lower costs.Although the utilities are still unpopular in the UnitedKingdom, most experts would be willing to defend theperiodic price control system as one that gives companies anincentive to cut costs and return the gains to consumersafter a short time. The high profits of the early 1990s weredue largely to unanticipated, one-time productivity gainsfollowing privatization that are unlikely to be repeated.The established method for resetting price controls makesfurther "mistakes" unlikely.
PDF
download
878987797
028-85220240
