6.2 Government Response to Market Failure

(The toolbox, in the syllabus's order — each instrument with its economics and its Nepal instance.)1. Monopoly regulation — the natural monopoly's price rules (cost-of-service ratemaking; the price-cap alternative — NEA's electricity tariff hearings as the Nepali practice); the regulated- access design (the grid open to private generators — the sector's structure since liberalisation); the regulatory agency's dilemma: price at marginal cost (efficient, loss-making) vs average cost (break-even, inefficient) — the perpetual second-best.2. Antitrust/competition policy — the law of market structure and conduct: cartel prohibition, abuse of dominance, merger control — Nepal's Competition Promotion and Market Protection Act 2063 (2006) with its enforcement body (ECO-I 3.4's closing point); the instrument's economics: restoring the competitive benchmark where entry can't; the remedy menu (fines, structural separation, behavioural undertakings).3. Tax and subsidy — the Pigouvian tax (price the externality: tax equal to the marginal social damage — the polluter pays by paying the treasury) and the subsidy (pay for the positive externality: vaccination, girls' schooling, the fertiliser subsidy's mixed record; electricity's lifeline tariff); the design problems: measuring the damage, avoiding distortion of the harmless (the tax's own deadweight).4. Operating control (direct provision and command) — the state as producer (the public enterprises: electricity, oil — the commanding heights of ECO-I 5.1); licensing and standards (quality floors where information fails: drugs, food, professions —…