Price cap regulation is defined as regulation that
A) imposes a price ceiling on the regulated firm.
B) encourages firms to exaggerate costs to increase profits.
C) uses marginal cost pricing to ensure efficient output.
D) uses average cost pricing to ensure costs are covered.
E) is essentially the same as rate of return regulation.

Question

Quizplus · Accepted Answer

Price cap regulation imposes a maximum price that a regulated firm can charge, thereby placing a price ceiling on its products or services. This is different from other types of regulation, such as rate of return regulation, which focus on ensuring that the firm earns a fair return on its investments. Price cap regulation is often used in industries where there is a concern that firms may have market power and be able to charge excessive prices.

Price Cap Regulation Is Defined as Regulation That