Abstract
In this study, we analyze the regulation of markets for the provision of services whose costs are subsidized for paternalistic reasons. We model the choice of a benevolent regulator who wants to maximize consumer welfare in a setting where quality cannot be verified and the good provided is fully subsidized. The choice is thus made between two types of providers (profit maximizers and altruistic providers) and two frameworks (monopoly franchise and quality competition). Our analysis shows that in this environment the performance of mixed markets is always dominated by pure forms. Moreover, although making efficient providers compete for the market minimizes cost, the choice of quality competition with altruistic providers may be preferable from a welfare point of view whenever service quality is relevant and the productivity differential is not substantial.