REGULATION BY PRICES AND BY COMMAND

Standard economic theory states that regulation by price is more effic ient than regulation by command and control. Exceptions may arise if r egulators have good knowledge of the supply curve. In practice, though , governments usually regulate by command and control and do so when t here is uncertainty about the technology of supply. We show that gover nment may prefer to regulate by command and control when it cares abou t the investment decisions of a firm.