Controlling regional monopolies in the natural gas industry: the role of transport capacity

This paper analyzes some optimal fiscal, pricing, and capacity investment policies for controlling regional monopoly power in the natural gas industry. By letting the set of control instruments available to the social planner vary, we provide a characterization of the technological and demand conditions under which “excess” capacity in the transport network arises in response to the loss of the two other control instruments, namely, transfers and pricing. Hence, the analysis yields some insights on an economy’s incentives to invest in infrastructures for the purpose of integrating geographically isolated markets.