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A Pedagogical Note on the Superiority of Price-Cap Regulation to Rate-of-Return Regulation

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  • Kevin M. Currier
  • Brian K. Jackson
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    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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    File URL: http://hdl.handle.net/10.3200/JECE.39.3.261-268
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal The Journal of Economic Education.

    Volume (Year): 39 (2008)
    Issue (Month): 3 (July)
    Pages: 261-268

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    Handle: RePEc:taf:jeduce:v:39:y:2008:i:3:p:261-268

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    Cited by:
    1. Albane Degrassat-Théas & M. Bensadon & C. Rieu & M. Angalakuditi & C. Pen & P. Paubel, 2012. "Hospital Reimbursement Price Cap for Cancer Drugs," PharmacoEconomics, Springer, vol. 30(7), pages 565-573, July.

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