REGULATION STRATEGIES FOR THE PROVISION OF PATERNALISTIC GOODS

In this study, we analyze the regulation of markets for the provision
of services whose costs are subsidized for paternalistic reasons. We model the choice
of a benevolent regulator who wants to maximize consumer welfare in a setting where
quality cannot be verified and the good provided is fully subsidized. The choice is thus
made between two types of providers (profit maximizers and altruistic providers) and
two frameworks (monopoly franchise and quality competition). Our analysis shows
that in this environment the performance of mixed markets is always dominated by
pure forms. Moreover, although making efficient providers compete for the market minimizes
cost, the choice of quality competition with altruistic providers may be preferable
from a welfare point of view whenever service quality is relevant and the productivity
differential is not substantial.