The Effects of Price Regulation in Contracting out Transport Services

Using a model that explicitly considers service quality, this paper focuses on the problem of whether local government should regulate price in contracting out local public transport services. In the case where price is regulated, the outcome is a lower price, higher output, and lower quality. In spite of a decrease in quality, the net consumer surplus is higher when price is regulated. Since the transport firmʹs profits are higher when price is not regulated, local government and transport firms never reach a ʹʹwin-winʹʹ agreement. Consequently, which party has the legal right to determine price is highly significant.