On the impact of productive efficiency and quality of a regulated public utility upon final goods prices and consumer's welfare

In this paper, we analyse the process by which the decisions of a regulated local public utility, in terms of productive efficiency and quality of the service provided, impact on prices of final consumption goods, supplied in a oligopolistic market operating in the same geographic area. The regulation rules we consider are twofold: a Price-Cap mechanism and a Minimum Quality Standard constraint, both largely applied in the practice of public utilities regulation in industrialised countries. In particular in Italy these rules are applied in water and waste collection services. We obtain some formula for these effects which can be quantified by estimating firms’ conditional input demand function of the public service and firms’ inverse demand function for this public good, non-rival, component. Finally, we draw the effects of productive efficiency and quality on consumer welfare via changes on tariffs, external effects and final goods prices. Keywords: regulation, x-efficiency, oligopoly, consumer welfare. JEL Classifications: L51, D11, D21