Subsidize firms to permit MC pricing. Offer to subsidize inefficient firms. Have government issue licenses to eliminate excess variety, and pay subsidies to correct for insufficient variety. Hard to identify efficient technology. Very hard to know when variety is excess or insufficient.
Real regulation faces all of the problems of ideal regulation, plus the incentive problem.
As seen in Part I of the class, the end result of competitive lobbying can be to waste resources equal to the prize being awarded. The Demand for Idiocy People often don't like thinking rationally about problems. They often find it more comfortable to believe whatever they feel like believing. The marginal cost of voting irrationally is zero, so people buy a lot of irrationality in politics. This makes politicians' incentives even worse, since they can do well by satisfying the demand for willful idiocy.