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Impediments. Economists Data not available Jurisdictional boundaries limit regulator’s power Regulators must know the following for Ramsey to be an improvement Distortions (when firms price above MC) Degree of interdependence. Complication #1. Goods as inputs
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Impediments • Economists • Data not available • Jurisdictional boundaries limit regulator’s power • Regulators must know the following for Ramsey to be an improvement • Distortions (when firms price above MC) • Degree of interdependence
Complication #1 • Goods as inputs • Price below MC (Lancaster 1979) • When good is an intermediate good such as electricity, and communication • Effects efficiency in the vertical chain
Complication #2 • Asymmetric information (Sappington 1983) • Regulator knows demand and cost structure • Lacks info on a particular technology structure • Can’t pinpoint cost exactly • If price is set too low, firms leave • If price is set too high, excessive profits • Regulator strategy will deviate from Ramsey
Complication #3 • Long-run vs. Short-run • Long-run elasticities > Short-run elasticities • Long-run substitutability must be accounted for • Distorts incentives elsewhere
Real World • Arguments for ROR and against Ramsey and MC are that regulators will never have full info • Advance in technology complicates Ramsey pricing • Often Ramsey is not implemented with transfers – not Pareto superior • Ramsey- not free of subsidies (i.e. low income) • Kamerschen and Keenan • Ramsey is more of a “theoretical curiosity than a workable regulatory rule.” • Ramsey possible when • Output not strongly linked to other sector demand and supply elasticities
Linked elasticities • Strongly linked • No link