ECM159 Economics of Regulation and
Competition Portfolio Questions


Answer only THREE of the FOUR questions. The overall word limit for your portfolio of 3
answers is 2700 words – you can exceed this overall limit by up to 10%. If you exceed the
latter, I will read the first 2700 words only. Please start answering each of your chosen
questions on a new page clearly indicating at the top the number of the question without
copying the question itself. (If you do, Turnitin will report it as part of the similarity count, and
you may be flagged up unnecessarily.) Please note that you will be penalised for either
exceeding the absolute upper limit of words or answering more than 3 questions. Try to be
evaluative and critical rather than repetitive. The more you succeed in this, the more marks
you will receive for your effort, and you will avoid high Turnitin scores leading to penalties. The
references corresponding to the in-text citations should appear as footnotes in your document,
and they do not count as part of the word count. Algebraic notation diagrams, legends etc. are
also not part of the word count. If you wish you can draw the diagrams by hand and then scan
and insert them into the text. Under no circumstances should you photocopy diagrams from
books, journals etc. as this is a violation of copyright.

1. Explain and discuss why distribution matters for efficiency using Stiglitz’s
sharecropping example. Discuss the alternative ways in which asymmetric information
problems can be alleviated including distribution, Vickers’ arguments (1995) for “more
competition” and more generally through the use of incentives and side payments.


2. Explain and discuss the Rate of Return Regulation and critically assess the validity of
the different conclusions drawn from the fact that the value of the allowed rate of return
on capital, s, exceeds the cost of capital, r. (Averch-Johnson effect)

3. Explain and comment on the difference between a) signalling, as a solution to adverse
selection using the Spence model of education and b) screening, as in the quality
based second-degree price discrimination. Model each by clearly showing the
participation and the incentive compatibility constraints. Discuss the efficiency and
inefficiency arguments surrounding two-part pricing that is a) quantity based and b)
quality based.

4. Critically assess the view that the RPI-X regulation offers greater incentives for
productive efficiency that the Rate of Return Regulation (RoR). Does the type of
industry regulated makes a difference as to the appropriateness of the approach
adopted?