Rate- of- return regulation is inefficient because it induces the monopolist to:
A)use input bundles that are too capital intensive.
B)use input bundles that are too labour intensive.
C)produce more output but also charge a higher price.
D)produce less output than it would in the absence of the regulation.

Question

Quizplus · Accepted Answer

Rate-of-return regulation can lead to inefficiency by encouraging a monopolist to over-invest in capital, making their input bundles too capital intensive. This is because the allowed rate of return often applies to the firm's asset base, incentivizing the firm to increase its asset base to increase its overall allowed earnings.

Rate- Of- Return Regulation Is Inefficient Because It Induces the Monopolist