Th3.6: ^^ Profit Regulation Flashcards
1
Q
In the USA, where is ‘rate of return’ regulation used?
A
where prices are set to allow coverage of operating costs and to earn a ‘fair’ rate of return on capital invested, based on typical rates of return in a competitive market
2
Q
How is this a good thing?
A
it aims to encourage investment and prevents firms from setting high prices
3
Q
How is this a bad thing?
A
it gives firms an incentive to employ too much capital in order to increase their profits
4
Q
Why is there little incentive to be efficient?
A
since a reduction in costs will not improve the firm’s situation
5
Q
As with ‘RPI-X’ it also means that regulators need…
A
sufficient knowledge of the industry and so will suffer from asymmetric information
