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Price Effects of Regulation: International Air Passenger Transport, Telecommunications and Electricity Supply

Staff research paper

This paper by Samantha Doove, Owen Gabbitas, Duc Nguyen-Hong and Joe Owen was released on 16 October 2001, in conjunction with the staff research paper, Global Gains from Liberalising Trade in Telecommunications and Financial Services.

This study represents an early attempt to quantify domestic regulatory regimes in international air passenger transport, telecommunications and electricity supply.

In particular, it attempts to estimate the extent to which regulations in these service industries have raised prices. It does so by extending recent research undertaken by the Organisation for Economic Co-operation and Development (OECD) into the effects of domestic regulation in these industries. It uses the OECD’s analytical results to derive regulatory tax equivalents — an overall measure of the effect of domestic regulatory regimes on prices in each service sector. And it extends this measurement beyond OECD countries.

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The Productivity Commission has released two staff research papers entitled Price Effects of Regulation: International Air Passenger Transport, Telecommunications and Electricity Supply and Global Gains from Liberalising Trade in Telecommunications and Financial Services.

These two staff research papers are the latest in a stream of research exploring the price and other effects of regulatory regimes in service industries. They apply new analytical methods to extend this emerging area of economic research. The results from both studies provide insights into the mechanisms by which regulatory regimes affect service industries and the economy.

Price Effects of Regulation draws on research undertaken at the OECD to quantify the effects of domestic regulatory regimes on prices in up to 50 economies for 3 sectors — international air passenger transport, telecommunications and electricity supply. The study finds wide variations in regulatory regimes across economies for each sector.

The results suggest a positive relationship between the stringency of regulatory regimes and higher prices in each sector. For example, the bilateral system of restrictions on the number of air passenger flights between countries and the conditions under which they operate are estimated to collectively increase airfares by between 3 and 22 per cent. Global Gains from Liberalising Services uses a general equilibrium model to assess the effects of liberalising trade in telecommunications and financial services for 19 regions of the world.

Results suggest that economies gain from removing barriers to the establishment of new operations (domestic or foreign), and by liberalising the operations of existing operators. For the world as a whole, the one-off gains are estimated to be at least 0.2 per cent of combined GNP, or about US$50 billion.

Background Information

Patrick Jomini (Assistant Commissioner) 03 9653 2176

Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443

Preliminaries
Cover, Copyright, Contents, Preface, Acknowledgments, Abbreviations and explanations, Overview

1 Introduction

2 International air passenger transport
2.1 Current regulatory arrangements
2.2 Measuring restrictions
2.3 Price impacts

3 Telecommunications
3.1 Reform in the telecommunications industry
3.2 OECD modelling of the impact of regulations
3.3 The impact of regulation on telecommunication prices
3.4 Results
3.5 Conclusion

4 Electricity supply
4.1 Regulatory reform in the electricity industry
4.2 OECD modelling of the impact of regulations
4.3 Extending the economy coverage
4.4 Calculating the price impact of electricity regulation
4.5 The impact of regulation on electricity prices
4.6 Conclusion

References