The author deduces an optimal policy for regulating a transport company in a case where the public authorities have uncertain information about the actual demand. The optimal policy embodies a trade-off between securing external efficiency in the transport market and controlling the operator’s profit.
Topic: 23. Regulation
This paper studies pricing and capacity decisions in markets for phone-ordered taxicabs. Firms first choose capacities and then compete in prices. As firm demand increases, so does waiting time. This dampens competition and makes prices too high from the social point of view. Efficiency improves if firms choose large capacities. In a two-firm setting, equilibrium capacities are shown to be larger if both firms maximise total profits than if they maximise profits per cab.
Forcing a carrier to price a captive shipper at marginal cost will not enhance efficiency.
Smog check programmes have failed for several reasons: (1) Current programmes only encourage cars to be clean on the inspection day and do little to deter motorists from tampering; (2) Although most emissions come from a few vehicles with high emissions, current programmes require inspection of all cars; (3) About half the cars repaired following an inspection have increased emissions.
The paper analyses three different policy regimes for regulating a transport company with private information about costs. Each policy is defined by a public monitoring strategy and a contractual relationship. By defining the expected public administrative costs of collecting information, we derive the necessary and sufficient conditions for the different regulation systems to be compared.
Consumers, influenced by their incomes, are assumed to opt for private or public transport as a long-term decision. Those who have opted for public transport then choose particular services which are least costly in terms of both price and convenience. This two-stage framework involves both vertical and horizontal product differentiation, and yields a new perspective on bus deregulation. Allocative inefficiency from deregulation can be substantial, and can amount to a third of the costs of operating the bus system.
Regimes of regulation of the bus industries of ten Western European countries are reviewed. A reluctance to accept British style open entry is observed, explained mainly in terms of the greater emphasis placed on the use of local political control as an instrument of social and economic policy.
A substantial reduction in operating cost per bus-kilometre through improved productivity is shown. However, substantial losses to users through higher fares and service instability emerge. Large increases in bus-kilometres operated did not produce any aggregate increase in ridership, but offset much of the reduction in unit cost. Overall, a small net benefit is shown in the metropolitan areas, but a net loss elsewhere. In contrast, London (subject to a competitive tendering system) shows no user or worker losses, and a substantial net benefit through higher productivity.
The paper examines the impact of deregulation on service co-ordination in the British conurbations outside London. Co-ordination decreased significantly in respect of timetables, fares and passenger information in particular in the period immediately following deregulation. Since then some aspects of co-ordination have improved. On balance, the author’s judgement is that there has been a net decrease in consumer welfare.
This paper attempts to explain how published cost savings have been achieved and particularly the impact of changes in wages and working practices within the context of deregulation and privatisation. Amongst metropolitan PTCs almost 19 per cent of a total unit cost reduction of 31 per cent was achieved by productivity improvements. Reductions in wages can only account for 4-8 per cent of cost savings while non-labour costs account for less than 5 per cent. The process of privatisation may be the most influential factor in reducing costs.