Impact of Regulation on Transport Infrastructure Capacity and Service Quality

This paper investigates the impact of economic regulation on transport infrastructure capacity and service quality. We find that for a monopoly profit-maximising infrastructure provider, its capacity is the largest under cost-based regulation, which is followed by rate-of-return regulation, no regulation, and price-cap regulation. Furthermore, we show that service quality has the same order as capacity investments: it is the highest under cost-based regulation, then rate-of-return regulation, no regulation, and is the lowest under price-cap regulation. However, numerical examples reveal that price-cap regulation yields the highest social welfare. © 2012 LSE and the University of Bath

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