“Public Utility” Regulation: Some Economic and Moral Analyses

Abstract

This Essay analyzes various economic and moral issues that relate to the actual/alleged unregulated conduct of public-goods producers, public utilities, and “businesses affected with a public interest” (including businesses engaged in common callings and common carriers) as well as to government regulation of these categories of businesses. It begins by criticizing the conventional definitions of “public goods” and “public utilities” and explaining why, on its original definition, “businesses affected with a public interest” were not simply “businesses whose decisions affected the public interest.” It then explains why the fact that one or more of the goods that an otherwise-Pareto-perfect (oPp) economy could produce were “public goods” would result in economic inefficiency. Next, it analyzes how the economic-efficiency problem posed by public goods and the economically-efficient response to them are affected by the reality that the relevant economy is not oPp. The Essay proceeds to explain why “fair-rate-of-return public-utility-pricing regulation” renders it profitable for regulatees to make otherwise-unprofitable decisions and delineates the variety of such inherently-unprofitable choices that such regulation renders profitable. It then discusses how these so-called Averch-Johnson-Wellisz (AJW) effects of such pricing-regulation complicate the task of public-utility regulation and raise the possibility that government production of the goods produced by public utilities may be more desirable than the public regulation of private production of these goods. This Essay comments on the way in which the relevant economies are not oPp affects the economic efficiency of the various AJW effects and complicates the task of regulating public-utility pricing. After that, it provides short accounts of the different types of moral analysis that are relevant to the assessment of the moral character of the choices made by the types of businesses traditionally perceived to require regulation and of various regulatory responses that government could make to such businesses. It uses these accounts to assess various moral criticisms that have been made of such businesses and the moral desirability of the government’s regulating such businesses in different ways. The Essay concludes by listing some of the most important reasons why actual government business-regulations are less than optimal and outlining various policies that might improve the quality of government regulation of business.