Experience with public regulation of monopolies indicates that
A) on the average, regulated prices are clearly lower than unregulated prices of the same item.
B) regulation provides a stronger set of incentives than competitive markets for firms to increase efficiency.
C) a decision to base a fair rate of return on either historical cost or replacement cost yields the same pricing result.
D) most public utility regulation should be in the hands of federal rather than state commissions.
E) if a firm is guaranteed a fixed amount of profit, it will be less efficient than if its profits depend on how efficiently it operates.

Question

Quizplus · Accepted Answer

This statement is known as the "incentive regulation" principle and is widely accepted in economic theory. The idea is that if a firm is guaranteed a fixed profit, it will have no reason to be efficient because its profit does not depend on its efficiency. On the other hand, if a firm's profit is tied to its efficiency, it will have a strong incentive to be efficient. This is why most public utility regulation is based on performance-based regulation rather than rate-of-return regulation.

Experience with Public Regulation of Monopolies Indicates That