Review of Industrial Organization 21: 21–40, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Taxation by Regulation and Regulation by
Taxation: The Case of Local Cable TV Regulation
and BRADLEY M. BRAUN
Nevada Public Utilities Commission;
University of Central Florida, College of Business
Administration, P.O. Box 161991, Orlando, FL 32816-1991, U.S.A.
Abstract. Until late 1986, municipalities played a major role in cable television regulation. Muni-
cipalities not only regulated pricing and quality decisions but also taxed cable systems in the forms of
in-kind and in-cash concessions. These activities appear to ﬁt well with the concept of taxation-by-
regulation, which concludes that consumer welfare is reduced because of the rent seeking behavior of
local politicians. At the same time however, the notion of regulation-by-taxation is equally plausible.
That is, politicians may use taxation as a means to regulate the activity of a monopoly by limiting
monopoly rents and improving consumer welfare. This article empirically separates these two effects
and investigates the implications for consumer welfare.
Key words: Consumer welfare, regulation by taxation, taxation by regulation.
The concept of taxation by regulation was ﬁrst introduced and applied to cable
television regulation by Posner (1971, 1972). In Posner’s view, taxation by regu-
lation is a means to divert monopoly proﬁts from cable companies to the public
purse, rather than a policy to limit monopoly proﬁts.
Taxation by regulation has
been mentioned often as a reason why local franchise regulation fails to promote
While regulation may indeed be a method of taxation, an
equally plausible argument is that the extraction of franchise fees may be a method
of regulation. If rent-seeking behavior by municipalities is a means of limiting
monopoly proﬁts, then there exists regulation by taxation.
McChesney (1987) adds an additional dimension to the framework. He suggests that rather than
acting as pure brokers who exact and redistribute rents among interest groups, regulators may seek
rents for themselves.
See, for example, Beutel (1990), Hazlett (1991), and Boudreaux and Ekelund (1994).
Another critical issue related to local franchise regulation and franchise bidding is whether it
leads a winning bidder (franchisee) to engage in some degree of opportunistic behavior. Responding
to Demsetz (1968), who introduced the idea of franchise bidding as an alternate to rate regulation
as a means of controlling natural monopoly behavior, Williamson (1976) pointed out the potential
opportunistic behavior by a winning bidder.