ABSTRACT
This chapter looks at the various approaches a government can take to utility price regulation. There are considerable problems when it comes to determining the prices at which regulated utilities should price. The changes that occurred to the basic utilities in Australia during the 1990s meant that a considerable amount of work had to be put into the construction of pricing regulations for these industries, especially those possessing natural monopoly characteristics. One approach to monopoly provision is for the government to subject the monopoly firm to economic regulation. Economic regulation typically refers to government imposed restrictions on firm decisions over price, quantity and entry and exit. Choosing the appropriate pricing approach can be controversial, but the more likely it is that competition can emerge and become effective then the more light handed the pricing approach should be. The efficient cost of service approach for instance should be used for those monopoly facilities that very clearly have natural monopoly characteristics.
