Introduction
Regulators often focus on issues of price, incentives, and market structure.148
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Pricing, incentive regulation, and market structure are covered in Chapters V, IV, and II respectively. However, issues of service quality, achieving social objectives, and the environment – sometimes collectively called non-price issues – also receive considerable attention. As in the case of tariff design, there are instances in service quality, social, and environmental issues in which the interests of the operator and the interests of the government may coincide. An example is the case of prepaid cards for mobile service in telecommunications discussed in Chapter V. Telecommunications operators developed these cards without government direction and many poor are now able to have phone service as a result of these cards.
There exist, however, situations where the interests of the government differ from the interests of the operator.149 149 [HIDE]
See Chapter I for a discussion of the importance of asymmetries between the operator and the government. For example, if the customer at the margin – i.e., the customer who is most indifferent about whether or not to purchase the service – is not very responsive relative to other customers to changes in service quality, then the operator has an incentive to under invest in quality. Furthermore, if the environmental impact of the utility service is an externality, then a profit-maximizing operator would under invest in environmental protection. An externality is an effect that is visited on someone who is not a party to the transaction.150 150 [HIDE]
Some references in Chapter V discuss pricing with externalities. For example, if producing electricity causes air pollution, people who are not purchasing the electricity may suffer from the air pollution. Absent government intervention or some other extra-market effort, this pollution effect does not affect the operator’s profits, so the operator does not make production decisions that are beneficial from a welfare perspective. When the interests of the operator and the interests of the government do not coincide, the government may find it optimal to establish incentives for the operator to pursue the government’s goals with respect to service quality, social issues, and the environment.
We consider these issues in this chapter. We discuss service quality issues and then environmental issues. We complete this narrative by considering social issues. Following this chapter’s narrative is a list of references, organized by topic.
