On the Political Economy of Regulation

Summary: During the past decade, theoreticians have laid the foundations for optimal normative regulation. Taking as an example the pricing of a communication channel, this article demonstrates the need to go further and choose the lesser of two evils: economic inefficiency or political arbitrariness. The sophisticated pricing methods envisaged by the theory do in fact give politicians considerable latitude to distort tariffs in their own interests or those of the group backing them. Exactly the same type of choice has to be made in laying down constitutional rules governing regulation and privatization.