Rate-of-return regulation

As profitability regulation (including rate -of -return regulation) a method for the regulation of monopolies is referred to in economics, which is based on the return on capital employed.

In this case, the monopoly price is a regulation imposed on the expected in a perfect market price (price equal to marginal cost ) of the oriented and it opened a market interest rate on the capital employed.

Criticism

A disadvantage of this method lies in incentives for the company to maximize the capital invested. The larger the approved surcharge for return on capital employed, the greater are further incentives, the production factor to displace labor by capital. An optimal factor input ratio, as required for a Pareto- efficient economy, so that is no longer possible. This is known as Averch Johnson effect.

History

The rate -of -return- regulation was a widely used method of regulation in the United States. It has now been largely replaced by other methods, for example, the maximum price regulation, the better incentive effects are attributed.

Some say that all regulatory procedures in the long term lead to a return regulation.