Michael A. Crew

On the Efficiency of Law: A Public Choice Perspective

Economists have not yet developed a comprehensive theoretical framework, incorporating transaction-cost economics within a public choice perspective, for predicting when there will be an efficiency problem with the law. Transaction-cost reasoning and the rent-seeking insight have not been applied systematically in a dynamic institutional context to evaluate when the law will be used to increase (or not minimize) problems of bounded rationality and opportunism. This paper takes a first step at identifying and remedying this deficiency. The paper first provides a critical review of relevant theoretical contributions made by Becker (1983, 1985), Posner (1977), Priest (1977), Rubin (1977, 1982), Williamson (1975, 1985), and others. We then show how analysis of the efficiency of law can be synthesized into a broader whole by incorporating transaction-cost economics more fully into existing understanding of rentseeking in the political realm. Thus, within the public choice paradigm, this paper develops a deeper transaction-cost analysis of the efficiency of law. Building on prior research by the authors (Crew and Rowley, 1988a, 1988b; Twight, 1983, 1988), the paper identifies variables that position legal rules on a spectrum that ranges from those that are predominantly transaction-cost

Economic Depreciation and the Regulated Firm under Competition and Technological Change

Capital recovery is increasingly important to utilities, especially telephone companies, when technological change and competitive entry are occurring. In the absence of efficient capital recovery policies companies are going to see their equity eroded. In addition to losses by the companies there are likely to be losses to ratepayers in the form of reductions in service quality and higher rates in the future. To address the above problem this paper first reviews economic depreciation and capital recovery in the simple case of a regulated single product monopoly facing competitive entry. It employs the concept of economic depreciation to show how capital recovery policies will be front-loaded. It also develops the concept of the window of opportunity for capital recovery. There is a limited time for regulators to take remedial action, and if timely action is not taken there is no alternative but for the company to fail to recover some of its capital. These results are shown under both traditional rate of return and price caps.

Price Caps and Revenue Caps: Incentives and Disincentives for Efficiency

This paper is concerned with the application of incentive regulation in the electric utility industry in the United States. With increased competition in this industry traditional cost-of-service regulation is increasingly inefficient and unsustainable. The new developments will require the introduction of regulatory schemes that provide greater incentives for efficiency and at minimum eliminate some of the incentives for inefficiency present in existing regulation. In approaching the problem, we will draw not only upon existing regulatory schemes in the United States but also on the experience in the United Kingdom which involved the universal adoption of price cap regulation (PCR).

Regulation, Pricing and Social Welfare

Michael Crew and David Parker have compiled a comprehensive, up-to-date and detailed analytical work on leading research issues in the economics of regulation. With contributions from international specialists in economic regulation, the Handbook provides a comprehensive discussion of major developments in both the theory and practice of regulatory economics. This book will be an indispensable source for both students and practitioners of regulation.

Pricing in Postal Service Under Competitive Entry

The increased competition recently apparent in postal services takes several forms, which includes the development of new and superior services. Examples include over-night express and courier services, improved parcel and small package services, improved tracking, worksharing arrangements—primarily presorting—and downstream access to the postal network. In this paper, we confine ourselves to the discussion of the two latter forms of competition, namely, worksharing and downstream access. While our analysis is intended to be generic in application, we will draw heavily on United Kingdom and United States experience, as these are the postal authorities that we have studied most intensively.

Peak-Load Pricing of Postal Service and Competition

As we argued in our earlier paper, the United Kingdom Post Office has a long and distinguished tradition of innovation going back to the reforms of Rowland Hill. On September 16, 1968, the Post Office introduced another major innovation, the two-tier pricing system. Peak-load pricing thus became universal in the Post Office. Without fanfare, in one stroke, peak-load pricing was applied completely to one industry. Despite the many exhortations for peak-load pricing in electricity, telephone, and other industries, in no other industry has peak-load pricing been so extensively applied as in the Post Office.1 While the practical experience of peak-load pricing gained by the Post Office has been considerable, the significance of the two-tier pricing systems has generally been missed in the literature of academic economics. The analysis provided by economists of the peak-load pricing problem in postal service has been limited to testimony by John Panzar (1984) and our recent paper with Marc Smith, (Crew, Kleindorfer, and Smith 1990, C-K-S).

Postal Service in the Nineties

Postal service is big business. Consider the United States. The United States Postal Service handles over 40% of the world’s mail, with a work force of over 700, 000 and with revenues of nearly

Liberalization in the Postal and Delivery Sector

50 billion. Over the years, the Postal Service has moved from a department of government to a public enterprise organization, and is introducing high-tech equipment with further changes in progress. At the same time traditional postal service is facing competition not only from other types of delivery services but also from electronic communications. Competition has been made stronger by advances in microelectronics, telecommunications, and computers. Postal service will need to respond to the competition by adopting new technologies, being more flexible in its pricing and product mix, addressing issues of quality in part by using quality to differentiate its products, and by pricing efficiently. This paper will begin to address such issues drawing upon the recent literature on competition and sustainability of natural monopoly.

Regulatory Governance and Competitive Entry

Recent and forthcoming changes in the regulation of postal and delivery services throughout the world will have a major impact on this important sector. The contributors to this timely book, a combination of academics and industry insiders, address the trends toward privatization and competition and illuminate the evolving economics of the sector.

Incentive Regulation, Capital Recovery and Technological Change in Public Utilities

Regulation of network industries, notably, telecommunications, electricity, gas and postal service, has changed significantly in recent years and has become increasingly complex. Although 1984, with the divestiture by AT&T of its operating companies, was seen as a landmark event, the process had begun several years earlier when competition in the long-distance market was first allowed on a small scale. The entry by MCI into long distance was initially minuscule. However, the camel’s nose was under the tent, and, despite valiant efforts by an exceedingly accomplished and regulatory-oriented AT&T management, the battle and the war were lost. AT&T and regulation would never be the same again. Not only was AT&T affected, but the impact was also felt on other industries formerly subject to traditional cost-of-service regulation. Allowing entry into regulated monopolies undermines the traditional structure of these industries and of regulation itself. The problem is that regulators and companies, to say nothing of regulatory economists, were flying blind. Once entry was allowed, the consequences were not clearly foreseen. The contradictions created are still to be resolved.