Optimal Regulation: The Economic Theory of Natural Monopoly

by Kenneth E. Train

published by MIT Press, 1991.

To order: Call MIT Press at 617-625-8569, extension 772

Japanese language version: Translated by Prof. Tetsuzo Yamamoto of Waseda University and Prof. Tetsuo Kanesawa of Risho University, published by Bunshindo of Tokyo, 1998. To order, call (03)3230-4081 or telefax (03)3234-5249.

To download a pdf file of the entire book or individual chapters for viewing, click here.


Optimal Regulation addresses the central issue of regulatory economics--how to regulate firms in a way that induces them to produce and price optimally. It synthesizes an extensive literature on what constitutes optimality in various situations and what regulatory mechanisms can be used to achieve it. It is the first text to provide a unified, modern, and nontechnical treatment of this complex field.

The book describes incentive mechanisms and rate designs for promoting optimality, and presents all of the material graphically, with clear explanations of often highly technical topics.

Optimal Regulation
  • Synthesizes and presents the recent theoretical contributions on how to regulate natural monopolies.
  • Addresses how to design regulatory procedures that transform the profit drive of firms into socially desirable outcomes.
  • Takes a broad view of regulation, bringing in politics, history, psychology, and public welfare.
  • Examines models not as ends in themselves but as stepping-stones to thinking more deeply about regulation.
  • Presents the material with as little math as possible.

    Excerpts from reviews

    "A synthesis of twenty years' of theory on the regulation of natural monopoly presented with exceptional clarity."
    Elizabeth E. Bailey
    Hower Professor of Public Policy and Management,
    The Wharton School of the University of Pennsylvania

    "...a thoughtful, concise, and meticulous addition to the natural monopoly literature."
    Oliver Williamson
    Transamerica Professor of Business, Economics and Law,
    University of California, Berkeley

    "The writing is clear and intuitive, unburdened by a lot of technical apparatus. It discusses cutting-edge theory and contains many useful applications of the theory."
    Professor David Sibley
    University of Texas

    "Professor Train is a master expositor. [His] book provides a valuable introduction to the new regulatory economics, and will surely find a place in many economics of regulation courses."
    Professor Michael Riordan
    Boston University
    in the Journal of Economic Literature

    "This volume by Kenneth Train does an extremely valuable service in bringing together the main thrusts of the more recent literature and, by setting it in the context of the traditional framework, enables comparative analysis. Equally importantly it does so in a manner which is both lucid and extremely well structured."
    Professor Kenneth Button
    Loughborough University
    in Economic Journal

    "The book presents the major ideas needed to represent existing regulatory institutions, to define optimal prices, and to reveal the working of a range of new incentive mechanisms."
    Professor Roger Sherman
    University of Virginia
    in the Southern Economic Journal

    Table of Contents

      Introduction: The Economic Rationale and Task of Regulation
    1. The Averch-Johnson Model of Rate-of-Return Regulation
    2. Regulatory Mechanisms to Induce Optimal Outcomes for One-Product Natural Monopolies
    3. The A-J Model under Uncertainty
    4. Ramsey Prices
    5. The Vogelsang-Finsinger Mechanism
    6. Surplus Subsidy Schemes
    7. Multipart Tariffs
    8. Time-of-Use Prices and Riordan's Mechanism
    9. Self-Selecting Tariffs and Sibley's Mechanism
    10. Optimality without Regulation

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