Two proposals to improve price-cap regulation

Robert D. Cairns*, Anthony G. Heyes

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


Under price-cap regulation, economic gains can be unlocked by permitting "trades" which do not make consumers worse off. We propose a simple method for "refereeing" such trades, based on compensating variation and utilizing Fisher's ideal price index. It is theoretically preferred to the Laspeyres indices used in price-cap regulation, but requires a small amount more effort. The method can be extended, in a natural way, by computing one or both of two adjustments for nonhomotheticity of preferences and for welfare or political weights. These considerations are important in reality, but either extension would require considerably more effort.

Original languageEnglish
Pages (from-to)243-251
Number of pages9
JournalJournal of Institutional and Theoretical Economics
Issue number2
Publication statusPublished - Jun 2004

ASJC Scopus subject areas

  • Economics and Econometrics


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