Public Law, Regulation and Competition Law: Economic Analysis
This domain tests applied institutional economics: why powers are allocated across levels of government, when regulation beats markets or liability, and how competition authorities define markets and screen mergers.
Public law and federalism
Oates's decentralisation theorem assigns public goods to the lowest level whose benefits do not spill over; Tiebout sorting supplies a market-like discipline on local provision. Spillovers, scale economies and race-to-the-bottom dynamics argue for centralisation. Public-choice analysis predicts that concentrated beneficiaries lobby harder than diffuse payers, producing rent-seeking, logrolling and rational ignorance; capture theory predicts agencies serve the regulated. EU law adds subsidiarity under Article 5(3) TEU and proportionality review.
Regulation
Natural monopolies need price regulation. Marginal-cost pricing is first-best but loss-making, so regulators use average-cost pricing, Ramsey pricing (higher markups where demand is inelastic), or price caps such as RPI−X. Rate-of-return regulation invites the Averch-Johnson bias toward excessive capital. Regulation is preferable to liability when harm is diffuse, causation is hard to prove, or insolvency defeats damages.
Competition law
Article 101 TFEU prohibits agreements with the object or effect of restricting competition; block exemptions cover benign vertical and R&D arrangements. Article 102 prohibits abuse of dominance, not dominance itself. Market definition uses the SSNIP test; concentration is screened with the HHI, summing squared market shares. The EU merger thresholds: post-merger HHI below 1000 raises no concern; 1000–2000 with a delta below 250 is safe; above 2000 a delta below 150 is safe.
Worked example
Five firms with shares 20, 20, 20, 20, 20: HHI = 5 × 400 = 2000. Two merge, giving 40, 20, 20, 20: HHI = 1600 + 3 × 400 = 2800, a delta of 800. Being above 2000 with a delta above 150, the merger falls outside the safe harbour and triggers substantive investigation, even though post-merger shares alone are moderate.
Traps
Market share is not market power - check entry barriers and buyer countervailing power. Do not describe Article 101 as a per se prohibition; the EU uses object or effect, with no true per se rule. Do not confuse dominance with abuse. Do not treat the HHI as dispositive - it ignores potential competition and efficiencies. Do not confuse double marginalisation (a vertical problem) with double counting.