Regulation strategies for the provision of goods Governmment make affordable to all the population

What is it about?

In this study, we analyze the regulation of markets for the provision of services whose costs are subsidized by Government for paternalistic reasons. In this case Goverment want to make the service available to all the citizens independently of their ability to pay for the cost. Examples may be health and social care, sport facilities, cultural and education services. In most real world economies, some of these services are offered by quite heterogeneous providers and in this article we want to assess from a theortiecal point of view which is the best market form to produce these services. We model the choice of a benevolent regulator who wants to maximize consumer welfare in a setting where quality cannot be verified and the good provided is fully subsidized. The choice is thus made between two types of providers (profit maximizers and altruistic providers) and two frameworks (monopoly franchise and quality competition). Our analysis shows that in this environment the performance of mixed markets is always dominated by pure forms. Moreover, although making efficient providers compete for the market minimizes cost, the choice of quality competition with altruistic providers may be preferable from a welfare point of view whenever service quality is relevant and the productivity differential is not substantial.

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Why is it important?

In the recent past for several patenalistic goods (especially health care, but also in other contexts this is relevant) mixed market have been introduce. By mixed markets we mean a context in which a private provider (that maximises profit) compete with a public/altruistic provider (that maximise a more complex function that takes into account surplus, but also consumers' utility). Given the mixed evidence on the performance of these markets, we have proposed this study where we compare also two different market setting: monopoly franchise where only cost reduction is important and spatial competition where quality plays a role. Our model shows several interesting things: a) mixed market are never optimal; b) the choice between monopoly franchise and spatial competition depends on quality evaluation by consumers and on how this variable can be verified; c) altruistic providers, although less efficient, may be in some cases preferred to private providers. I

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