Graduate School of International Corporate Strategy, Hitotsubashi
Asian Tax and Public Policy Program
Economic Analysis of Regulation and Public Enterprise
Why, What and How to Regulate?
Bakhodir Mardonov IM0313
February 20, 2001
Recent empirical studies have showed that national indicators
correspond closely to the degree of competition in telecommunications
markets. Greater competition has generated greater innovation,
investment and spin-offs for the economy as a whole. However, many
governments have found that competition in telecommunications can bear
good results only if appropriate regulatory institutions are functioning
effectively. Consideration of advantages and disadvantages of specific
regulatory policies raises questions on why regulate, what to regulate
and how to regulate.
Why Regulate Telecommunications?
There are different approaches trying to answer this question, but
basically they are split into two views: whether government should
regulate actively or intervene only in case of “market failure”.
Public policy goals: Even though the ultimate goals are the same, the
relative priority given to different goals may vary. For example, in
developing countries with a limited access to telecommunications
services, the policy goal to make them universally accessible is
especially important. While, in developed countries, the priority goals
may be to raise the efficiency of telecommunications and maintain a
basic telephone service.
Market failure: General goals such as “universal accessibility” cannot
be enough to justify regulatory intervention when the prevailing view
relies on market forces to promote efficiency and innovations. In this
case, the strongest justification takes the form of “market failures”
and the regulator may intervene in order to facilitate competitive
entry, combat abuse of market power and redistribute benefit.
Actually, the nature of the problems addressed depends on the structure
of the telecom services industry, the general economic, political and
social situation and the prevailing set of fundamental
telecommunications policies, particularly those concerning the roles of
monopoly and competition. Accordingly, we may consider three groups of
countries: (i) full monopoly, (ii) partial monopoly and (ii) full market
As some countries have moved from one of these groups into another, the
major problems to be solved by regulators have changed. For example, as
Mexico introduced competition in cellular services and privatised its
former state telephone monopoly, Telmex, it has faced controversial
issues concerning the interconnection of different carriers' networks.
In the United States, the evolution of the telecommunication industry
since the 1950s illustrates a gradual transition from the first group
via second to the last one: if in the beginning, the regulatory policy
concern was to assure the universal availability of telecommunications
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