1. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
How Workable is Pro-Competitive Regulation?(♣)
Alberto Ruiz-Ojeda
Jean Monnet Professor(*)
University of Málaga (Spain)
Contents:
1. What competition means in regulatory ethos; 2. Do regulators dream of electric grids?; 3. Call me
irresponsible: a world without opportunity cost; 4. The response blows in politics and collective action
governance; 5. Concluding remarks; References.
Abstract
As the years have been passing by, it should be time to revise how the current state
of the art of regulation theory is working with some counter-effects of regulatory
practice. Obviously, this task is not possible without coming back to the original
foundations of regulation. If we are not wrong, the mainstream of regulation
policies and literature has fashioned the move of promoting competition within
regulated sectors to correct the competitive restrictions imposed by regulation, that
is, by setting up regulated monopolies or oligopolies. Is the remedy worse than the
illness itself? The successive waves for regulatory reform make us wonder if
regulatory transitions produce more harm to the public and the economy as a whole
than the supposed advantages.
Our analysis would be centred in examining why the so-called natural monopoly,
as the hardcore of regulatory justification, has been mostly accepted uncritically. In
this point, the neo-institutional approach sheds good light onto the issue as it places
the focus on property rights configuration and transaction costs appraisal. To
propose a provisional conclusion, if regulation does not match the
efficiency/fairness test, its basic rationale should rely simply on the government
willingness to gain room for shadow taxation and regulatory takings, that is, to
enshrine an alternative means for rent seeking and redistribution. Constitutional
coherence, economic soundness and social sustainability go hand in hand in any
regulation accountability treatment. The starting outlook of our paper consists of a
moderate, sceptical consideration of regulation techniques and regulators
capabilities in public governance.
1. What competition means in regulatory ethos
Beneath the tumult of vast economic literature on regulation and competition lies some
conceptions supposedly accepted by readers and writers. In my view, this seriously
damages the intensity of debate and gives a poor clue to social scientists’ work in that
(♣) I would like to thank Professor Francisco Cabrillo for his useful suggestions and insights sharing. My
gratitude also to Barbara Goff for her ingenious corrections in style on the earlier versions of this paper.
The responsibility on the form and contents remains mine wholly and unexceptionally.
(*)
European Module “Regulation and Regulated Sectors within the European Integration Process”, Ref.
2008-2686.
1

2. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
critical field. I am referring to something similar to a you-know-that-I-know-that-you
know, that is, an implicit sharing of ideas which actually are not shared or, at least, must
be discussed in depth.
Once we approach any issue involved with competition, the idea of equilibrium is
placed in front of us and we are suddenly abducted by the forces of a kitchen-made
world where demand and supply curves intersect and marginal cost curve breaks
abruptly to zero. In his 1973 article, Axel Leijonhufvud treats, in an hilarious manner,
how life is within a bizarre tribal community, the Econ, imaginarily studied by an
anthropologist in a remote Polynesian isle. Endowed with their respective rites, taboos
and totems, the Econ tribe is divided into castes and separated according to different
status. The two main castes are the Micro and the Macro and both have in common a
xenophobic-like reluctance to their adjacent neighbours, the Polscis and the Sociogs,
settled in more friendly lands.
My favourite humoristic sketch of lawyers -my original tribe- comes much earlier than
Leijonhufvud’s. In the late 19th century (1884), Jhering -a largely influential Romanist-
published an essay entitled “In the Heaven for Legal Concepts. A Fantasy”, a tale of
how a legal theorist’s soul is received in a post-mortem paradise, where he dwells in the
company of the concepts he dealt with in his earthly life, but in their most perfect,
immaculate purity and ideal beauty. Where do legal practitioners dwell after dying?
They enjoy, according to the spirit who guides the newcomer, a very different heaven,
still located in the solar system, with its own sunlight and atmosphere, both
incompatible with the absolute vacuum required for concepts heavenly existence.
Sense of humour seems to me indispensable to pour a drop of soundness into two
disciplines, law and economics, crooked by scholarly abstraction and largely dominated
by a priestly elite of learned people, careless on how things actually work in human
relations and real societal context. I would not pay so much attention to the goodness or
badness of theoretical work if ideas were irrelevant to human conduct; on the contrary,
ideas do matter, because man is the only being led by them, both for individual and
collective action. As my intellectual affiliation, neo-institutionalism has taught me that
social order does not evolve per saltum, but in an overlapping process in which
institutions peck each other and are inevitably determined by cultural and psychological
factors. Two reflexions must be added to the social structure conditioning of
institutions: a) they are incomprehensible without the continuous feed-back of their
implementation and, b) the most remarkable effects of institutions, as explained by
North (1990: 135-136), are driven by their matrix of incentives. Neo-institutionalists
should bear in mind one decisive caveat: rather than playing with institutions, we are
played by them. Bastiat (1889: 7)1 pointed out the virtue of a good economist -
1
Let me insert here this admirable quotation:
“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a
series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its
cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate
if we foresee them.
There is only one difference between a bad economist and a good one: the bad economist
confines himself to the visible effect; the good economist takes into account both the effect that
can be seen and those effects that must be foreseen.
Yet this difference is tremendous; for it almost always happens that when the immediate
consequence is favourable, the later consequences are disastrous, and vice versa. Whence it
follows that the bad economist pursues a small present good that will be followed by a great evil
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3. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
extendable to any other social scientist, in my view-, by stressing the importance of
ascertaining what is not seen in institutional game for political economy. I have just
introduced another component of my intellectual baggage which takes me away from
the predominant neo-classical way of thinking and gets me back to an age where social
sciences where not organized in separate layers commanded by chief specialists.
Studied in depth by Grice-Hutchinson (1952), a disciple of Hayek based in Málaga until
her death in 2003, the School of Salamanca summed up the struggle, rooted in the
ancient Greece, to incarnate the moral values of economic liberty in workable
institutions. The citation of Hayek consciously anticipates my preferences for the
Austrian School of Economics and this paper is an attempt to combine the neo-
institutional and the Austrian insights.
It is well known the Hayekian approach to competition (1968), whose core consists of a
discovery procedure. By negative feedback, competition makes possible the market
spontaneous order, a catallaxy, as he likes to name it. In a more anthropological way,
Hayek will say that “Man is not, and never will be the master of his fate: his very reason
always progresses by leading him into the unknown and the unforeseen where he learns
new things” (1973, vol. 3: 176). The disappointment of expected results plays in social
sciences the same role of hypothesis refutation in the experimental ones, as upheld by
his friend and fellow Austrian K. Popper. The difference between market and economy
(oikos-gnomos, the order of the household) rests onto the intentionality of the latter, and
to pursue a made order implies a zero-sum game where any win requires a correlative
loose. Competition, like in whatsoever game, means that results are not given in
advance.
I do not fully subscribe the Hayekian conception on human behaviour and social
interactions. Human beings are not plainly the masters of their destinies, but they are so
in a limited fashion. What I do share with him is the idea that intentions are not facts, in
other words, we must not confuse what we want with what we really get and that taking
as given what we -or any other enlightened mind alleging our representation- aspire to
get is an unacceptable imposition which undermines human dignity. We just know what
happens afterwards, never before it does or does not, that simple. I will retake this
argument later on to deal with the concept of cost.
From my perspective, based on Coase and North contributions, regulation is a toolkit of
institutions and organizations for collective action directed to influence the actual
configuration of property rights, to reduce transaction costs, or both. This does not mean
that regulation excludes spontaneous institutions produced voluntarily or customarily
within social groups. Institution endowment and organization functioning do breed
transaction costs and voluntary arrangements are not always possible when the number
of stakeholders is large, property rights are not well defined, information asymmetries
accrue or uncertainties alter the sovereignty of the consents involved. Regulation has
always existed and will exist in collective action dynamics, that is, in social interaction.
As regulatory institutions, regulatory organizations, particularly regulators, have
adopted varied forms. I understand by regulators the bodies, whether governmental or
not, in charge of any specified functioning regulatory regime. A kind of regulator comes
to our minds as a typical one: those on duty at network industries. Although I will
to come, while the good economist pursues a great good to come, at the risk of a small present
evil” (stress provided).
Bastiat’s pamphlet was originally published in 1850.
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4. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
devote further down especial attention to this sort of regulatory organizations, the
common feature of regulators’ activity consists of managing intentionally by institutions
property rights and/or transaction costs two essential factors: entry and prices.
Regulators’ action is also a discovery process, but distinct from that involved in the
market, and the difference is made by the fact that regulators intervene externally onto
the regulated activity, that is, they make decisions, but without suffering or profiting
from their consequences. In other words, regulators are not market agents. Not
surprisingly, this essential factor distorts regulators’ vision of how much an to what
extent the resources involved are scarce and, at the same time, their attitude towards
hazardous events and the lessons to be taken from mistakes and unaccomplished
assumptions. Competition is commonly seen by regulators as a corrective tool for their
management, an accessory to control some regulatory excesses, rather than the essential
motion of market functioning. True competition cannot be set up, introduced once it has
been previously excluded or used in an intentional way to obtain preconceived results.
This is not competition, but organized rivalry. Competition can be promoted and
protected by indispensable institutions, but not created nor intentionally directed
towards previously conceived outputs. I have the impression that most regulators and
legislation makers devote their efforts to run some competitive niceties on the regulated
industries, just not to appear too regulative. We are taking in the next section a short trip
into network industries regulation foundations, to deal later with cost and prices in
regulated sectors.
2. Do regulators dream of electric grids?
In the words of Nelson (1966: 3), “one of the most unfortunate phrases ever introduced
into law or economics was the phrase natural monopoly. Every monopoly is a product
of public policy. No present monopoly, public or private can be traced back through
history in a pure form”2. As in 1968 Philip K. Dick’s novel, network industries are
placed by regulation literature in an end-of-history world where unregulated natural
monopolies have almost disappeared and to own one of them is a kind of rare, luxurious
status. Regulated natural monopolies is the terminus of a war between social
benefactors and voracious entrepreneurs who reached in their industries the so-called
scale economies through which they practiced human exploitation by copping essential
facilities in the public’s detriment.
Such an erroneous theory implies an arbitrary denial of business history. Demsetz
(1968: 55-56), among others, unveiled how natural monopoly justification for
regulation has no real roots, nor scientific consistency. If we take to the limit the natural
monopoly rationale, scale economies, any efficient industry shall be regulated, in so far
as, according to A.D. Chandler (1990), scale and scope economies are the features of
good economic performance. Why not regulate every single business, whether big or
small, on the grounds of scale economies?
Natural monopoly rationale drives to prevent the world from destructive competition. I
have never understood why the selective effect of competition is considered destructive
2
A similar critique can be found in H.M. Gray (1940: 9-10).
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5. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
in this deceptive sense. J.A. Schumpeter (1943: 81ff) talked about the crucial difference
between the intervened or planned economy and the market: the former consists of a
process of destructive destruction, while the latter in a creative destruction one. Once
again, nirvana breaks into our minds and stability becomes the only value worthy to be
pursued and, once again, history experience is rejected. Even in the case of network
industries, as Demsetz showed, monopoly was not the consequence of competition
among firms, but the result of the pro-monopolistic activity of local and regional
constituencies by launching the auction to grant a monopolistic position within given
areas to one firm with the exclusion of the previously competing ones. If we prefer the
quietest way of life, we must renounce innovation, and this is what is excluded by an
unnatural monopoly imposed for the sake of avoiding creative destruction. Regulators
do dream of electric grids, which implies that industrial sectors are seen through the lens
of networks. As networks cannot be duplicated, a common carrier status shall be
established to serve plural providers of services to consumers who actually compete as
if they were in a real market. Always the as if loop. The flamboyant panacea of this pro-
competitive regulation is known as unbundling, already converted in a widely spread
policy guidance (Ogus, 1994: 290ff; Cruz Ferrer, 2002: 246ff). Another important
axiom of network industries is derived from destructive competition assumption: it is
cheaper to have just one provider than several because the avoidance of facilities
duplication. Cheaper for whom? For the industries, for the consumers or for both? This
is an amazing, self-accomplished prophecy with no comparative terms. Is anybody able
to demonstrate how cheaper a solution is once the alternative has been eliminated and
the new one has not come into existence?
Network industries regulatory panorama offers the vision of multiple laboratories where
enlightened characters make experiments. But those laboratories are not such, they work
with real firms, real consumers and real resources in the real economic arena. All side-
effects and counterfeits that can be eluded in a laboratory cannot be avoided in actual
economic conditions. Conscious of this, regulation theory also deals with transition
from present regulatory regimes to future ones. Regulation gives birth to regulatory
rights (Yackle, 2007: 64-67) and changes in regulatory framework provoke two
opposed effects, regulatory takings and regulatory givings. This happens in the form of
deregulatory takings, as pointed out by Sidak and Spulber (1997), when the orientation
of regulatory reform intends to be pro-competitive.
The Spanish electricity sector is an interesting sample of how the move for more
competition works in network industries, at least in some of its features. With the
occasion of the 1997 Electricity Act, a process of unbundling similar to the British one
was put into practice: generation and commercialization were liberalised, while
transportation and distribution were formally monopolised, along with the establishment
of a wholesale market able to provide correct price signals. The up-to-then verticalized
big electricity operators began to pressure the Government to be compensated for their
expected revenue and profit loses caused by sector restructuring, assets depreciation and
market quotas reduction by new companies entry. The final solution was a package of
public debt issue through securitization bonds, named Transition to Competition Costs
(Costes de Transacción a la Competencia-CTCs), the fruit of an intense, non-transparent
negotiation between the Spanish government and the former electricity monopolies. As
Gómez-Ferrer (2003) argues, the amazing result of the experiment can be appraised a
few years later: the recognition by the Government of an obligation to pay for the
deregulatory takings infringed by a phantom competition which has proven its
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6. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
inefficiency in reducing electricity prices and opening the sector to new entrants (most
of the new generating and commercialization firms are distribution monopolists’
subsidiaries). We are before what Sidak and Spulber (1997: 495ff) call managed
competition, a temptation which regulators supposedly must avoid in any case -
according to the authors- but they never can, because the strategy of enhancing
competition through deregulation is intrinsically biased due to the monopolization of
essential facilities. All this has important effects on prices and, not surprisingly, on
public debt, whether the latter be explicitly recognised and issued onto financial markets
or not. Certainly, pro-competitive regulation is a kind of shadow taxation, that is, fiscal
action in disguise. I do not think this is abominable, what I mean is that naming things
properly is of great help in collective action as a redistributive machinery. I am dealing
immediately with regulatory pricing to later carry on with public governance.
Let me just say a word on the way of doing things in pro-competitive regulation. In
network industries, the competition where possible move implies a desire to trace a
regulating framework contract between the regulator and the regulated firms (Goldberg
1976; Collins 1999: 305ff), within which a multitude of agreements, both explicit and
implicit, take place. It is much easier for the government to make a deal with few
stakeholders than with many of them, and this is what regulation provides in spite of
real market.
3. Call me irresponsible: a world without opportunity cost
One cannot speak of prices without speaking of costs, but prices have much less to do
with costs than we normally think. Price is simply the monetary value of a given,
specific transaction or exchange. How prices are formed is one the most difficult,
intricate debates in economic theory. The Austrian School contribution on value as a
subjective parameter (Menger 1871: 114ff) refutes the senseless search of the unicorn
by economists, the identification of price and value3. In his outstanding review of price
theory development, Buchanan (1973: 16) identifies the economists’ original sin and its
counterfeits in regulatory fields:
“(…) more importantly, we must try to construct meaningful, if limited, norms for
decision-making in non-market institutional structures. In competitive markets prices
tend to equal marginal costs, but do we want to make prices equal ‘marginal costs’ in
non market settings, when we fully realize that marginal costs can only be objectified by
the arbitrary selection of some artificially homogenize measure? Do we really want to
make one beaver exchange for only two deer when poisonous snakes abound near the
beaver dams? Of course not! But how do we know that the snakes are there? Because
beaver hunters think they are?” [stress provided].
3
Menger explains the subjective meaning of value in connection with opportunity cost in a rudimentary
but neat way, as follows:
“(…) the value of a particular good (or of a given quantity of goods) to the economizing
individual who has it at his command is equal to the importance he attaches to the satisfactions
he would have to forgo if he did not have command of it” (1871: 162).
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7. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
As said by the Spanish poet Antonio Machado, “The stupid confuses value with price”4.
In a further step, insanity leads regulators to feel themselves assisted by the power of
establishing how much things value. This arbitrary, supernatural mission is
accomplished according to some changeable dominant trends that make regulation task
quite similar to a catwalk for regulated prices, where glamorous models show their
stylists’ fancy designs. Originally, it was the marginal-cost with subsidies trend
formulated by the early French engineers from the École polytechnique, then the linear
prices as corrected by Ramsey which gave place to nonlinear prices (two-part tariffs),
later on peak-load pricing, to derive to Littlechild (1981, 1988) price-cap and, finally up
to now, Laffont and Tirole (1993) incentive regulatory prices with two pendulum
extremes, cost-plus and rate-of-return formulae5.
Price is a term whose use might be forbidden in regulation domain because what is not
guided by the market is not a price. Actual economic decisions and behaviour require a
factor which is absent in regulation, opportunity cost, the only thing that deserves to be
called cost. Clearly, I base my statements in Buchanan’s ideas on cost (1969: 38ff). Cost
cannot be shifted to or imposed upon others who do not make the decision and put it
into effect because cost is the value attributed by the deciding subject to the alternatives
rejected; above all, cost can never be realized because of the fact of choice itself: the
option given up has never been enjoyed. The asymmetrical position of regulators is that
of no opportunity cost decision makers as they do shift onto others the results of their
choices. Regulators could be responsible in figurative terms not in real, economic sense.
Competition is an absurd, intrinsically defective exercise where deciders are not
connected with the consequences of their own choices, much less when exchange
mechanisms have been fashioned to transfer benefits and/or loses onto others. Let us
take the example of Ramsey price structure. Burdening clients of inelastic demand
products by higher rates in comparison with the elastic ones is a common behaviour of
companies in real markets, but this can be done just until the pressure of competitors
discover that way of rent transfer and they are able to offer to the public lower prices for
the overcharged products, making elastic what was inelastic. On the contrary, Ramsey
price structure becomes a cross-subsidization device in a regulated sector and, for that
reason, a form of taxation. This should be considered obvious, but complicated
theoretical lucubration does not always explain reality. Here comes the strength of
competition as a discovery procedure and its relation with prices, in other words, an
endeavour to change things in a more efficient, fairer manner.
The tools employed by regulation to decide on tariff structure are often presented as
market indexed. One means of setting the reference to market signals is benchmarking,
that is, the identification of other similar producers cost incurred functions to check
whether or not it is correct to permit regulated firms to shift onto consumers a certain
type and amount of costs. Another one is setting up organized markets inside the
regulated sector, ordinarily for wholesale transactions. Regarding benchmarking, one
can hardly accept a comparison between firms which do no run in market conditions as
a market test because it is exactly the opposite, a non-market reference. Organized
wholesale markets, so common in the electricity sector, can only provide valid guides
for exchanges among main electricity operators and common carrier fares approval, but
4
“Todo necio confunde valor y precio”, in A. Machado, Poesía, Editorial Andrés Bello, Santiago de
Chile 1986, p. 134. This verse is included in the poem Proverbios y cantares, dedicated to the Spanish
philosopher José Ortega y Gasset.
5
A useful summary of regulatory prices trends can be found in Berg and Tschirhart (1988).
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8. Paper delivered to the VIII Harvard Course on Law and Economics
17-20 October 2011
this is not the case of retail consumers who understand nothing about wholesale
fluctuations and, as a matter of fact, have the only option of electricity regulated tariffs.
As the monopolised grid constitutes a physical connection between producers and
consumers in network industries, typically electricity, clients act as hostages and none is
in the mood for alternative choices (Berg and Tschirhart 1988: 290). If we see the
situation from the point of view of the monopolised structures, we realize that common
carrier fares are too important to not determine the entire system of monetary
transactions in the sector. Competition, as Californian electricity deregulation
experiment has shown, destroys the grid and provokes the system’s collapse because it
is not compatible with the common carrier pattern; here we have the effect of excessive
duplication assumption, when the capacity of the common carrier is not able to support
demand, the uncontrolled habits of consumers do the rest. But, why are those habits so
destructive? Because prices do not send proper messages to agents in a regulated natural
monopoly situation; if duplication of facilities was accepted and put into practice, the
other side of a real market, the supply, would adapt both to increased demand and
reduction.
What tariff structures permits in network industries is the proliferation of irresponsible
measures directed to favour new technologies with more than doubtful advantages. The
spur for renewable sources of energy in electricity is a good example of that (Calzada et
al. 2009): have you been told that a standard photo-voltaic panel has just the capacity to
generate one-third of the energy required to be produced? The tariffs paid by the public
as a whole for the consumption of the awful conventional, fossil sources of energy
support the introduction of hugely inefficient green ones. This has a lot to do with social
imaginaries and cultural conventions and little with economic arguments.
4. The response blows in politics and collective action governance
Posner had already noted (1969: 90) that “public utility regulation is not encompassed
by a single discipline. Economics is clearly important, I would say fundamental; but law
and political science are also highly relevant. Failure to integrate the three disciplines
has hampered useful work in the field”. There is nothing wrong or shameful in
recognizing that the explanatory key of regulation relies largely in politics, furthermore,
that the deep sense of regulation lays down on collective action dynamics, the same as
taxation and eminent domain6. Posner brilliantly argued (1971) how regulation
techniques provides the same redistributive effect than taxes by an alternative path; later
on, Otsuka and Braun (2002) persuadably shown the permanent feedback between both.
Kahn’s economics of regulation bible (1971: 3) plainly admits that network regulated
industries “required access to the right of eminent domain” and that “governments have
6
I have already drawn the attention to this aspect in two previous essays: “Villar Palasí, pionero del
Análisis económico del Derecho público. (Sus artículos de los años 50 en la RAP)”, in M. Zambonino
Pulito (Ed), Nacimiento y desarrollo de la Administración moderna. Libertad de comercio. Pasado y
presente de los grandes maestros del Derecho administrativo contemporáneo. (Actas del V Congreso de
la Asociación Española de Profesores de Derecho Administrativo. (San Fernando, 5 de febrero de 2010),
Instituto Andaluz de Administración Pública, Sevilla 2011, pp. 327-261; and “La regulación económica y
sus eslabones perdidos”, in J.L. Martínez López-Muñiz, J.M. de la Cuétara and F.J. Villar Rojas (Eds),
Liber Amicorum del Profesor Gaspar Ariño Ortiz, Wolters-Kluwer, Madrid 2011, vol. 3, pp. 201-229.
Both papers are accessible at http://aro-publiclaweco.blogspot.com/.
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9. Paper delivered to the VIII Harvard Course on Law and Economics
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been unwilling to dispense these privileges freely”. This is the regulatory trade-off, the
redistributive game of natural monopoly put into effect by the mentioned regulators-
regulated contracts. The search for regulation basic foundation comes to an end at
public governance.
It is not strange that I. Berlin wondered (1961) on the existence of political theory as an
analytical tool to understand human behaviour in collective action. Lawyers and
economists are equally guilty of that generalized neglecting by remaining unaware that
what has really changed in western public governance is the position of the State, and
that its rise and strengthening is incomprehensible without the regulatory restriction of
competition by intentional monopolies. A simple glance at the globe political map
shows us how national units have been built on networks whose coherent assembly is
the final result of collective action efforts.
The Polscis and the Sociogs, the adjacent tribes to the Econ in Leijonhufvud’s parable,
provides us with sensible orientations to regulation understanding in collective action. I
will pick out one of each tribe, Mancur Olson (1971, 1982) and Max Weber (1947). The
insights of the latter were, as far as we are interested here, assumed by the former in the
formulation of the selective incentive notion. According to Olson (1971: 51, 133-134;
1982: 20-23, 34-35), selective incentives work to attract (positive ones) or to dissuade
(negative ones) the behaviour of individuals in a group-oriented way; in large political
groups, the coercion implied by taxation is the only way to successfully promote social
coherence by group-oriented individual action to finance collective goods. But public
good is not a closed category and, when taxation legitimacy is not sufficient to widen
the outputs provided by collective action, regulation comes into action. What regulation
does is to reduce the number of explicit stakeholders in potential public good provision
which, precisely, are made public or collective by the selective incentive, in other
words, by excluding or restricting competition, mainly through eminent domain
privileges and its indispensable derivatives, entry and price controls. Regulation gives
place to large clubs with club goods provision mechanisms mastered by means of
regulatory contracts devices. This regulators-regulated firms relations embed a workable
governance structure due to the reduced number of stakeholders; as a result, the
acceptation of new producers in the sector -the pro-competitive, deregulatory move-
largely depends on its deemed ability at avoiding structural stagnation, regulator’s
capture or consumer damages. Regulation is chosen as an alternative collective action
instrument to taxation because it is deemed to involve less transaction costs; as far as
constitutional rules demand for taxes, among others, parliamentary procedures, public
hearings, legislative support and strict administrative requirements to be implemented,
regulation does not need any of these, but a contractual-like management and a
smoother fashion of individual acceptation. Certainly, transaction costs become a
critical issue to choose between taxation and regulation, and transaction costs are never
easy to measure. However, despite these extreme difficulties, the regulatory option
brings up severe constitutional issues, including political legitimacy and freedom
guarantees. Buchanan and Tullock (1962), the founding fathers of constitutional
political economy, put the stress on the incompleteness of constitutional contract and
the need of preserving the legitimacy of redistributive actions by obtaining a certain
degree of consent from those members of the community whose wealth is partially
taken in the benefit of the others. These demands for legitimacy are idiosyncratic for
regulatory strategies sustainability which, as I argue right now, are better satisfied when
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10. Paper delivered to the VIII Harvard Course on Law and Economics
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groups are small, territorially concentrated rather than in others set up as pools of
regulated firms and consumers.
Equal distribution, compensations of varied types and property rights intentional
configuration are regulatory techniques for redistribution used in every single regulated
activity. In the case of zoning (Ruiz-Ojeda, 2010), regulation is normally run in
situations of budgetary restrictions, poorly developed taxation schemes or, simply,
better chances for voters’ acceptance. Zoning emerges as a redistributive device in two
senses: a) by taxing property values; b) by taking property for public use. This makes
clear that taxation and takings are the two sides of the same coin and that regulation
necessarily involves both. In my opinion, regulation is not just a source of unfairness, it
can be converted into a reasonable, efficient tool of governance. That happens when
some basic conditions are met: a) the small size of the community (local level); b) the
rules of the game are generally known; c) agents can take decisions outside the political
sphere, by voting with their feet or their wallets. Typical constitutional constraints on
taxation and takings to moderate the majority rule make less sense when the prisoner’s
dilemma does not shape the scenario, that is, when eventual winners and losers have the
chance of avoiding the results of the majority imposition. An informal account comes
into practice and when the balance between what one gets and gives is not reached, a
quasi-market decision begins to function, because decision-makers know the message
they send to other community members and politicians will not be taken for granted.
5. Concluding remarks
We have taken hold of well-known ideas on regulation and competition in a rapid
itinerary through social science fields. I have mainly used a casual language rather than
a technical, sophisticated one, perhaps in the detriment of scientific rigor, but eventually
in favour of sincerity. Most of the issues have been just outlined and a serious
discussion of any of those would lead us too far away from the purpose of this modest
paper.
Regulation makes good sense when an essential condition is satisfied: its soundness as a
collective action means, and this is a matter of legitimacy. Some social scientists’
discourse have seriously eroded the consistency of regulation by striving to base it on
unreliable foundations and defective arguments. To my knowledge, natural monopoly is
the regulatory theory main misconception and, at the same time, the most disruptive
invention in competition understanding. Gambling with the number of entrants, setting
up regulated markets, and the like, just give room for regulatory adjustments, but does
not promote competition and cannot achieve the outputs of the market, among other
reasons because those outputs cannot be intentionally obtained. A touch of humility
seems to me essential for sensible regulatory policies: first of all, do not make more
harm. This caution was made by Kahn (1971, vol. 2: 12, 328-329) in his neo-classical
language: “even very imperfect competition is preferable to regulation”7. But imperfect
competition is what actually exists in real economies, not what regulation does by
monopolizing network industries or by administering rivalry within them.
7
I use literally the citation from the 1990 Edition added section “Introduction: A Postscript, Seventeen
Years After”, p. xxiii.
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11. Paper delivered to the VIII Harvard Course on Law and Economics
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My final suggestion should be: why instead of persisting in outrageous justifications do
not we, social scientists, simply tell the people and ourselves the truth on regulation?
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