INCENTIVE MECHANISM DESIGN FOR PUBLIC GOODS PROVISION UNDER PRICE CAP REGULATION

摘要

This paper studies the design of mechanism that induces monopoly enterprise to provide public goods under price cap regulation. Under the standard adverse selection model, when the expense of public goods is higher than a certain threshold of investment, monopoly enterprise is unwilling to provide public goods because of negative net profits. In order to induce the investment, government needs to relax price cap regulation to ensure high profits to the enterprise. This paper analyzes the optimal price cap regulation mechanism and further shows that consumer welfare associated with the optimal price cap decreases with the increase of expense of public goods.