(solution) Why do you suppose regulators are allowed by their legislative mandates considerable flexibility

(solution) Why do you suppose regulators are allowed by their legislative mandates considerable flexibility

Why do you suppose regulators are allowed by their legislative mandates considerable flexibility with respect to pricing, but are not allowed to subsidize firms out of general revenues? What are a regulated firm’s incentives to act anticompetitively in competitive markets when its monopoly market is regulated using price caps? Does it have the same incentives as a firm subject to cost-based regulation? Explain. Can you think of how implementation of price-cap regulation might create incentives for anticompetitive behavior?