Donald F. Vitaliano () (Department of Economics, Rensselaer Polytechnic Institute, Troy NY 12180-3590, USA) Gregory Stella (New York State Public Service Commission)
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The mathematical programming technique Data Envelopment Analysis is used to test the hypothesis of Averch and Johnson that utility regulation leads to overuse of capital. The regulated firm earns a return s greater than its cost of capital r, an implicit capital subsidy resulting in allocative inefficiency. Technical and Allocative inefficiency are based on Cost and Production Frontiers from 337 electric generating plants, and r is based on the Capital Asset Pricing Model. Capital is overused relative to fuel, but not labor. But regression analysis fails to find a significant relationship between the overuse of capital and the subsidy s-r.
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