The Welfare Effects Of Quality Regulation And Price Regulation Under Different Market Structures

Economic regulation has its root in market failure that results from externality, internality, entry barrier and market power. The main goal of economic regulation is to make up market failure and thus to improve the efficiency of resource allocation and social welfare. Quality regulation and price regulation are two important polices of economic regulation. However, whether or not the goal of economic regulation can be achieved depends on the implementation effect of the economic regulation polices. Therefore, it is important to analyze the implementation effect through regulatory impact assessment for the sake of improving the quality of regulation implementation.Based on the actual conditions of China, this paper analyzes the welfare effects of quality regulation and price regulation under different market structures, which use food industry and medical service industry as examples respectively. In addition, we incorporate the behavior of government and firms into our analysis framework to extend our research on minimum quality standard regulation.In this paper, we firstly analyze the impact of minimum quality standard regulation on product quality and social welfare in competitive market and monopoly market respectively. Then minimum quality standards and the levels of social welfare are compared under these two different market structures. Secondly, by incorporating the behavior of government and firms into game model, we analyze the effectiveness of minimum quality standard regulation under three different scenarios, including perfect enforcement, imperfect enforcement, and collusion for further research on minimum quality standard regulation in monopoly market. Finally, using Hotelling model, we analyze the price regulation in medical service industry based on the policies of medical service system reform in our country, and compare the equilibrium solutions in three scenarios, namely, private profit-maximizing duopoly, state-owned duopoly and mixed duopoly. Suggestions concerning optimization of market structure are proposed according to the results on the basis of maximizing social welfare.The results show that:(1) Minimum quality standard regulation increases the level of social welfare, but its effects are different under different market structures. Thereby, government should take the characteristic of market into consideration when making regulation policies.(2) Whether the regulation lives up to expectations depends on the government’s enforcement and the firm’s compliance. Both imperfect enforcement and noncompliance would hurt social welfare.(3) It is hard to achieve the desired results purely rely on price regulation or deregulation. Only by making use of the respective advantages of price regulation and competition through combining price regulation with competition can social welfare be greatly improved.