Social preferences and price cap regulation

Abstract

This paper analyzes the allocative properties of price cap regulation under very general hypotheses on the nature of society's preferences. We propose a generalized price cap that ensures the convergence to optimal ~second best! prices in the long-run equilibrium for virtually any form of the welfare function. Hence, the result of the convergence to Ramsey prices of Laspeyres-type price cap regulation is a particular instance of our more general result. We also provide an explicit and relatively easy to calculate and implement generalized price cap formula for distributionally weighted utilitarian welfare functions, as suggested by Feldstein (1972a). © 2002 Blackwell Publishers, Inc.