33 - Positive Theory of Price Regulation

Abstract

This chapter presents positive theory of price regulation. In full-information models on pricing, it is easy to distinguish between normative and positive theories. In normative theories, the government maximizes welfare; and in positive theories, it optimizes some other objectives, such as votes or output. In the asymmetric-information models on price regulation, this distinction is more complicated to draw. There are three main criteria that should be used to distinguish positive from normative theories: (1) the objective of the regulator, (2) the objective of the manager, and (3) the relationship between regulator and manager. The chapter discusses these three criteria. It discusses the way prices are regulated if the regulator applies positive-theory objectives instead of maximizing welfare objectives. Examples include maximization of votes, of budgets, or of output.