Question

General questions.....Short explanation about :

a- the principles of Transaction Cost Economics (TCE)... The key aspects of transaction costs and means of coordination.

b• How TCE applied to the regulation of infrastructures?

c. Applied to the regulation of infrastructures:What activities should be more efficiently coordinated by markets?

d. Difference between quasi integration and vertical integration. And why quasi integration more efficient?

Answer 1

a. Transaction cost economics refers to the alternative means of organizing transactions (ie; governance structures like markets,firms,hybrids and bureaus) which minimize the transaction costs.In other words,it is the cost of running the economic system of firms.It works on the basis of the following important principles:

• Directors of the firms are to prefer their own things,or to have at least long term contracts in place,as it makes their lives easier certainty and increased control over the future.

In such circumstances,they are likely to creater larger organisations and companies which might be beneficial for them.But this may not result in the best decisions for shareholders and other stakeholders as;

1. The ability to take advantage of good deals in the future might be lost due to long term agreements.

2.the growth of the company larger than is efficient.

3.simple renewal of contracts without observing the outside options as the directors get to know the staff and workers very well,they being internal.

The theory implies that each type of transaction brings up cordination costs of monitoring,controlling,and managing transactions.According to Douglas North,there are four aspects that comprise of transaction cost-'size of the market','measurement','enforcement',and 'ideological attitudes and perceptions'.Market size affects the partiality or impartiality of transactions.Measurement refers to the calculation of value of all aspects of good and services intricated in the transaction.Enforcement can be elucidated as the need for an unbiased third party to ensure that neither party involved in the trasaction backs out of their part of deal.The final aspect of ideological attitudes and perceptions summarize each individual's set of values that influence their interpretation of the world.

• b. Regulation in a wider approach is a focused and sustained control over the activities that a community values by a public agency.In recent years,the privatization of many infrastructure providers has created a ground area for the emergence of private monopolies which necessitated their regulation by the government. Nowadays,several regulatory methods like competition laws,franchising,regulation by contract,tradeable permits etc are in practice.Inorder to assess the efficiency of a particular regulatory regime,cost-benefit analysis and other methods of economic evaluation can be used which includes
• Preparation of regulatory impact study,selling out the cost and benefits of the proposed regulation, including risk-analysis.
• Demonstrate positive net benefits from the proposal to regulate.
• Identification of monetary costs and benefits along with non-quantifiable benefits.
• Preparation of 'Compliance Cost Assistance',which shows the costs to business of complying with the requirements of the proposed regulatory regime.

Enumeration of alternative regulatory approaches that might achieve the given regulatory objectives at a lower cost.

c. When focusing on regulation,general questions might arise as to what entities and what activities are to be regulated?.For service providers providing essential infrastructure services.there is a view that regulated assets should be ring-fenced from any high risk enterprises.The regulatory body is to identify the entity that is to carry out each function and should set out the parameters of each function clearly in the constitutional document of that body.However the main sector to be regulated is the monopoly sector.The main aim of regulating monopolies is to counter the tendency of monopolists to set prices,above and output below,the levels that would prevail under the competitive market conditions.