| Abstract: | Regulators cannot continuously and perfectly monitor firms. The alternative considered here supposes the regulator sets prices at discrete, unforeseen, times. I show that when marginal cost follows a stochastic diffusion process, but the regulator only irregularly adjusts the regulated price, the optimal price may be less than or greater than the expected level of marginal costs. The regulated price should be higher the steeper the demand curve, the lower the discount rate, and the greater the variance of costs. The social benefit of changing the price following a change in marginal cost is usually greater if at the time price was set marginal cost was low. |
