A WELFARE COMPARISON OF PRIVATE AND PUBLIC MONOPOLY

The cost function of a monopoly is C(q) = K + theta-q, where theta is unknown to the regulator. We evaluate various ownership and regulation regimes in terms of social welfare, determined by both the amount of total surplus and its distribution. Maximal welfare is achieved by the regulated public firm when its bias is pro-consumer, and also when it is pro-worker and theta is low enough. We compare an unregulated public firm with a private one regulated a la Loeb-Magat-Baron-Myerson and characterize the frontier, in parameter space, where one or the other dominates.