Taxation by Regulation

Abstract

Students of the regulated industries often assume that regulation is designed either to approximate the results of competition or to protect the regulated firms from competition. But neither view explains adequately a number of important phenomena of regulation and regulated industries. Foremost among them is the prevalence of internal subsidies, whereby unremunerative services are provided, sometimes indefinitely, out of the profits from other services. To understand this phenomena, we must assign another important purpose to regulation: we can call it taxation by regulation. The purpose of this paper is to explore the dimension of the regulatory process, to demonstrate that it explains some otherwise perplexing features of the process and the industries subject to it, and to compare it with other methods of public finance.