Kevin M. Currier () (Oklahoma State University) Brian K. Jackson (Oklahoma Wesleyan University)
Abstract
The two forms of natural monopoly regulation that are typically discussed in intermediate microeconomics textbooks are marginal cost pricing and average cost pricing (rate-of-return regulation). However, within the last 20 years, price-cap regulation has largely replaced rate-of-return regulation because of the former's potential to generate more efficient pricing structures and strong incentives for cost reduction. However, price-cap regulation has received little attention in microeconomics textbooks. The authors provide a simple discussion of price-cap regulation that demonstrates its superiority over conventional rate-of-return regulation, which forms the basis for a lecture on contemporary natural monopoly regulation.
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