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The Incremental Surplus Subsidy and Rate-of-Return Regulation


  • Blackmon, B Glenn, Jr


D. Sappington and D. Sibley (1988) propose an alternative regulatory mechanism, the Incremental Surplus Subsidy (ISS), that would induce the regulated firm to set price at marginal cost and eliminate all waste. The ISS would give the firm a subsidy equal to the one-period gain in consumer surplus resulting from its pricing decision. This article shows that the ISS does not induce greater production efficiency than traditional rate-of-return (ROR) regulation. The author proposes a "super-ISS" mechanism that would give the firm a subsidy greater than the gain in consumer surplus resulting from its pricing decisions. This super-ISS mechanism is shown to result in greater benefits than either ISS or ROR regulation. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Blackmon, B Glenn, Jr, 1992. "The Incremental Surplus Subsidy and Rate-of-Return Regulation," Journal of Regulatory Economics, Springer, vol. 4(2), pages 187-196, June.
  • Handle: RePEc:kap:regeco:v:4:y:1992:i:2:p:187-96

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    Cited by:

    1. Mohammad Reza Hesamzadeh & Juan Rosellón & Steven A. Gabriel & Ingo Vogelsang, 2017. "A Simple Regulatory Incentive Mechanism Applied to Electricity Transmission Pricing and Investment," Discussion Papers of DIW Berlin 1696, DIW Berlin, German Institute for Economic Research.
    2. Francois Melese & David Kaserman & John Mayo, 1996. "A dynamic model of advertising by the regulated firm," Journal of Economics, Springer, vol. 64(1), pages 85-106, February.
    3. Sappington, David E. M. & Weisman, Dennis L., 1996. "Revenue sharing in incentive regulation plans," Information Economics and Policy, Elsevier, vol. 8(3), pages 229-248, September.
    4. Sang-Ho Lee, 2006. "Tax Evasion and Monopoly Output Decisions Revisited: Strategic Firm Behavior," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(1), pages 83-92, April.

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