Regulatory Boundaries and Efficient Resource Allocations in the Production and Transportation of a Single Good

Abstract

This paper analyzes efficient resource allocations in the production and transportation of a single good in a spatial economy. It was demonstrated that an optimal allocation of resources maximizing net social payoff may require the franchising of decreasing-cost firms, together with marginal-cost pricing and subsidies, even though a viable competitive sector could exist in the absence of such regulation. In formulating regulatory policy in industries with both decreasing and non-decreasing cost firms, therefore, the criterion for policy makers should not be to confine government regulation to those areas and decisions which competition cannot regulate. Restricting entry and using correct output and pricing policies as needed would effectively establish regulatory boundaries for decreasing-cost firms. It was also shown that formation of such regulatory boundaries must necessarily consider production technologies in and transportation technologies among other markets in a spatial economy. Determination of the quantity to be produced in any market is interdependent with the determination of the quantity produced and consumed in all markets and of the quantities transported between markets.