The chapter uses Adam Smiths wealth of nations to complicate simple laissez-faire notions of economic development. Adam Smith argued that public works were crucial for economic development. Since they wouldnt always be provided by private firms there would need to be some government involvement. However, Smith argued that government waste and debt would continue to be risks of infrastructure, so he argued that infrastructure should be governed by cost-internalizing principles. Also, Adam Smith argued for natural monopoly, which would be exempt from market forces, which provided the groundwork for the idea of public utilities.

Discusses both normative accounts for regulation (Why should we regulate?) and alternative accounts that attempt to explain the existence of regulation (Why do we regulate?)

A question frequently arises in the field of human rights as to why the rights do not become real, even when they are recognized in legal frameworks. More specifically, how to convert economic, social and cultural rights into concrete reality? Why do not the legal frameworks translate into equality, changing the circumstances of those living in vulnerable conditions? Or, more specifically, what are the conditions that favour or hinder the implementation of ESCR?

Understanding the details of the way public service providers get their market power and use is essential to the design of regulatory supervision. The Lerner index is one of the most basic indicators available to assess the risks of abuses from market power. It measures the percentage of extra profit the firm can earn per unit sold on top of the marginal cost. A laissez-faire monopoly chooses its price to equate this Lerner index to the inverse of demand elasticity. When demand is inelastic, the firm can raise its price without cutting into sales. Prices’ regulation aims to alleviate this problem of rent extraction. But all financially viable pricing strategies delivering financial viability create deadweight losses as compared to marginal cost pricing. The only way in which marginal cost pricing and the financial sustainability of the operator can be reconciled is through subsidies. To compensate for the lack of competition in the market, regulators have tried to introduce competition for the market, but implementation failures have resulted in high prices and low quality. Welfare losses of regulatory failures in the public utilities sector range from 1% to 1.5% of GDP.

The common economist’s benchmark to assess the efficiency impact of a regulatory decision is to compare the output and price outcomes of this decision to those that would be achieved under marginal cost pricing. The chapter explains that the efficiency payoff of marginal cost pricing in public service industries has to be balanced against the financial losses from this pricing strategy. It is because the average cost of production is usually declining over a substantial range of output and the marginal cost is below the average costs that marginal cost pricing leads to financial losses. It is this existence of increasing return to scale that explains why public service operators are often labelled as natural monopolies. The associated market power is what makes regulation necessary to ensure that these monopolies do not under-provide the services and/or overcharge. The chapter explains that to minimize the risk of abuses, regulators need to get precise assessments of the elasticity of demand to prices and income and of cost functions since these are needed to be able to measure efficiency outcomes.

This chapter concludes by pointing to a number of key implications, takeways, and open questions that have emerged throughout this book. It highlights in particular the conclusions that the book derived from the application of the natural monopoly framework to digital platform markets; the competition policy implications that emerge from the economic literature on multisided markets; the role of breakup policies in digital markets; the institional refinements that may be desirable for a contestability and Schumpeterian-based policy approach; and some of the political economy implications that may derive from the emergence of different standards of regulatory intervention and enforcement across jurisdictions.