The difference between cost-of-service regulation and rate-of-return regulation is that

Question

Quizplus · Accepted Answer

Cost-of-service regulation sets prices based on actual costs incurred by the firm in providing the service, whereas rate-of-return regulation sets prices such that the firm earns a normal rate of return on its investment. Therefore, choice A correctly summarizes the difference between the two regulatory approaches. Choice B is incorrect because rate-of-return regulation does not set prices first; it sets a target rate of return and then allows the firm to set prices based on its costs. Choice C and D are both incorrect because they incorrectly attribute marginal cost pricing and average cost pricing to one or the other regulatory approach.

The Difference Between Cost-Of-Service Regulation and Rate-Of-Return Regulation Is That