Profitability regulation

As a viability control (also rate-of-return-regulation ) is in the economics a method for regulation of monopoles denotes that at profitability of the employed capital oriented.

A price is imposed on the monopoly through regulation, which is based on the price expected in a perfect market (price equals marginal costs ) and a customary interest rate is added to the capital employed .

criticism

A disadvantage of this method is the incentive for the company to maximize the capital employed. The greater the allowable surcharge on the return on capital employed, the greater the incentive to displace the production factor labor with capital. An optimal factor usage ratio, as required for a Pareto-efficient economy, is no longer possible. This is known as the Averch-Johnson effect .

history

Rate-of-return regulation has been a widely used method of regulation in the United States . In the meantime, it has been largely superseded by other procedures, such as maximum price regulation, which are assigned better incentive effects.

Some claim that all regulatory processes lead to profitability regulation in the long run.

literature

• Ronald E. Braeutigam, John C. Panzar: Effects of the Change from Rate-of-Return to Price-Cap Regulation . In: American Economic Review . 83, No. 2, 1993, pp. 191-198.