Averch–Johnson effect

The Averch -Johnson effect describes the incentive distortion in the regulated natural monopoly. A regulatory profit restriction on capital employed ( "rate of return" regulation) therefore distorts the factor input decision of the company. It is an inefficient high amount of capital employed ( over-capitalization ) and there is a displacement of labor demand. A market regulation can therefore not be attributed readily to the first-best solution to market.

This effect was described in 1962 by Averch and Johnson. It is one of the most influential findings in regulatory economics. To mitigate the effect was in 1983 by Stephen Littlechild proposed the maximum price regulation, which today dominates the German regulatory policy (especially in telecommunications).