Chapter 12: Regulation and Public Enterprise
12.1 Introduction
● Most economic decisions are made in the private sector
● Private-sector decisions are made within a framework provided by government policy
● These policy areas include:
○ International trade
○ The environment
○ Competition policy
○ Tax policy
● Framework policies determine the “rules of the game”
● In some cases, governments take a much more active and direct role in business
decisions, either through close regulation of firm-level decisions or through direct
government ownership and control of productive enterprises
12.2 The Meaning of Regulation
● Regulated Sector or Regulated Industries refer to a group of firms or industries
that are subject to price regulation or regulation of other important decisions normally
made without government intervention. Aka Close Regulation
● Each closely regulated firm is under the jurisdiction of some government appointed
regulatory board or commission
● Public Utilities produce or provide important infrastructure
○ Electric power
○ Distribution of natural gas and heating oil
○ Water
○ Waste disposal
● Public refers to ownership by government
● Publicly Traded Firms are firms owned by the private sector but shares can be
bought and sold on a stock exchange by anyone
● Privately Held Firm is owned by a private group and others can be excluded
● Public enterprises are structured as corporations , with a government as the sole
shareholder
● Government-owned corporations are called Crown Corporations
● Many public enterprises are not corporations
● Mixed Enterprise or Public-Private Partnership is a firm with significant
government ownership and significant private sector ownership
12.3 Natural Monopoly as the Rationale for Price Regulation
● The most extensiev level of price regulation and other types of close regulation is
found in the public utility sector
● The basic rationale for price regulation in public utilities arises from market failure
caused by natural monopoly
● Natural monopoly is caused by economies of scale (the advantages of producing a
particular product on a large scale) and economies of scope (advantages from
producing two or more related outputs in the same firm)
● Natural Monopoly is when a single firm can produce an output, or a set of related
outputs, at a lower cost for the relevant levels of output than two or more firms can
12.1 Introduction
● Most economic decisions are made in the private sector
● Private-sector decisions are made within a framework provided by government policy
● These policy areas include:
○ International trade
○ The environment
○ Competition policy
○ Tax policy
● Framework policies determine the “rules of the game”
● In some cases, governments take a much more active and direct role in business
decisions, either through close regulation of firm-level decisions or through direct
government ownership and control of productive enterprises
12.2 The Meaning of Regulation
● Regulated Sector or Regulated Industries refer to a group of firms or industries
that are subject to price regulation or regulation of other important decisions normally
made without government intervention. Aka Close Regulation
● Each closely regulated firm is under the jurisdiction of some government appointed
regulatory board or commission
● Public Utilities produce or provide important infrastructure
○ Electric power
○ Distribution of natural gas and heating oil
○ Water
○ Waste disposal
● Public refers to ownership by government
● Publicly Traded Firms are firms owned by the private sector but shares can be
bought and sold on a stock exchange by anyone
● Privately Held Firm is owned by a private group and others can be excluded
● Public enterprises are structured as corporations , with a government as the sole
shareholder
● Government-owned corporations are called Crown Corporations
● Many public enterprises are not corporations
● Mixed Enterprise or Public-Private Partnership is a firm with significant
government ownership and significant private sector ownership
12.3 Natural Monopoly as the Rationale for Price Regulation
● The most extensiev level of price regulation and other types of close regulation is
found in the public utility sector
● The basic rationale for price regulation in public utilities arises from market failure
caused by natural monopoly
● Natural monopoly is caused by economies of scale (the advantages of producing a
particular product on a large scale) and economies of scope (advantages from
producing two or more related outputs in the same firm)
● Natural Monopoly is when a single firm can produce an output, or a set of related
outputs, at a lower cost for the relevant levels of output than two or more firms can
