Externalities, economic incentives, and regulatory mechanisms

Abstract

In PART 1, we deal with the quality choice strategy of multiproduct monopolist when there exists informational asymmetry between firm and consumers. We formalize and analyze the economic incentives of the multiproduct monopolist who is unable to observe consumers`` preferences for product qualities. While the standard models concentrate on the consumers`` preference structure, therefore focusing on the economic incentives of consumers as a key concept of screening mechanism, they do ignore the firm``s cost structure, which determines the shape of quality jointly with the consumers`` preference structure. Based on this recognition, we generalize the cost relation between qualities, implicitly assuming the single crossing property of consumers`` preference. In the way of generalizing the cost relations between qualities, we develop a synthetic model of quality choice strategy of multiproduct monopolist in the presence of asymmetric information. We show that the major findings in standard models are largely come from the assumption on the independence of costs between qualities that are produced jointly, or more strictly speaking, from the special assumption of the constant rate of marginal cost-down from spill-over effect. According to the above findings, we examined the effect of several forms of regulatory remedies including those considered in Besanko, Donnenfeld, and White(1988) on the quality distortion. We show that the effectiveness of the various regulatory remedies differs depending on the nature of cost relatedness. We thus propose relevant regulatory remedies for differing cases of cost relatedness. In PART2, we focus on the environmental regulation issue which involves the control of negative externalities. We start our analysis by recognizing the economic incentives between the parties involved, i.e., the firm and the regulator, in reducing the pollution. With the recognition that most of the incentive mechanisms proposed in the existing literature...