Social preferences and price cap regulation

This paper analyses the allocative properties of price cap regulation under very general hypothesis on the nature of the society’s preferences. We propose a generalised price cap that ensures the convergence to optimal (second best) prices in the long-run equilibrium for virtually any form of the welfare function. Hence, the result of the convergence to Ramsey prices of Laspeyres-type price cap regulation is a particular instance of our more general result. We also provide an explicit and relatively easy to calculate and implement price cap formula for distributionally weighted utilitarian welfare functions, as suggested by Feldstein (1972a).