Deregulation and Privatisation

ing from its dynamic effects on the economy, the potential benefits from deregulation of an inefficiently regulated sector may be illustrated in a simplified scheme first worked out by Harberger (1954) for the estimation of welfare losses from monopoly20. In this case, the Harberger measure of welfare loss corresponds to that part of the reduction in consumer surplus which is not appropriated by the monopolist. In Figure 2a, the monopoly would set the price so that it exceeded the (supposedly constant) marginal cost by the amount AC, and the Harberger welfare loss would be the area of the triangle ABC. The welfare effects of regulation depend on its impact on the pricing behaviour of the monopolist as well as on the monopolist's costs. If regulation were efficient, the price would be fixed at the level of average costs which, in the simplified case of Figure 2a, are equal to marginal costs2' and the monopolist would break even. The benefit from regulation would then be equal to the area of the Harberger triangle, ABC, less the costs of implementing efficient regulation. However, for the reasons discussed above, regulation is unlikely to be efficient. Resources may be wasted so that actual average (and marginal) costs under reguation exceed marginal costs corresponding to efficient utilisation of resources. The