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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

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.

Suggested Citation

  • Kevin M. Currier & Brian K. Jackson, 2008. "A Pedagogical Note on the Superiority of Price-Cap Regulation to Rate-of-Return Regulation," The Journal of Economic Education, Taylor & Francis Journals, vol. 39(3), pages 261-268, July.
    • Handle: RePEc:taf:jeduce:v:39:y:2008:i:3:p:261-268
    DOI: 10.3200/JECE.39.3.261-268
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    1. repec:dau:papers:123456789/11666 is not listed on IDEAS
    2. 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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