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Capital Waste in the Rate-of-Return Regulated Firm

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  • Sherman, Roger

Abstract

Here it is shown how capital waste can be motivated under rate-of-return regulation, even when the marginal product of capital is positive. This result means that the sign of the marginal product of capital is not adequate as a basis for defining waste. The wasteful use of capital is motivated to avoid an inelastic region of demand, and involves pricing as well as technical input decisions of the firm. Copyright 1992 by Kluwer Academic Publishers

Suggested Citation

  • Sherman, Roger, 1992. "Capital Waste in the Rate-of-Return Regulated Firm," Journal of Regulatory Economics, Springer, vol. 4(2), pages 197-204, June.
  • Handle: RePEc:kap:regeco:v:4:y:1992:i:2:p:197-204
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    References listed on IDEAS

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    1. Armstrong, Mark & Vickers, John, 1993. "Price Discrimination, Competition and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 41(4), pages 335-359, December.
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    3. Mark Armstrong, 2001. "Access Pricing, Bypass, and Universal Service," American Economic Review, American Economic Association, vol. 91(2), pages 297-301, May.
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    5. Rosston, Gregory L. & Wimmer, Bradley S., 2000. "The 'state' of universal service," Information Economics and Policy, Elsevier, vol. 12(3), pages 261-283, September.
    6. Uri Ronnen, 1991. "Minimum Quality Standards, Fixed Costs, and Competition," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 490-504, Winter.
    7. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    8. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2000. "Universal service obligations and competition," Information Economics and Policy, Elsevier, vol. 12(3), pages 249-259, September.
    9. Valletti, Tommaso M, 2000. "Minimum Quality Standards under Cournot Competition," Journal of Regulatory Economics, Springer, vol. 18(3), pages 235-245, November.
    10. Milton L. Mueller, 1997. "Universal Service," Books, American Enterprise Institute, number 53006.
    11. Rosston, G.R. & Wimmer, B.S., 2000. "The "State" of Universal Service," Papers 99-018, United Nations World Employment Programme-.
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    Cited by:

    1. Noel Uri, 2001. "Telecommunications in the United States and Changing Productive Efficiency," Journal of Industry, Competition and Trade, Springer, vol. 1(3), pages 321-335, September.
    2. Larry Blank & John Mayo, 2009. "Endogenous Regulatory Constraints and the Emergence of Hybrid Regulation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 35(3), pages 233-255, November.
    3. Noel Uri, 2003. "The Effect of Incentive Regulation in Telecommunications in the United States," Quality & Quantity: International Journal of Methodology, Springer, vol. 37(2), pages 169-191, May.
    4. Dominik Schober, 2013. "Refinancing under Yardstick Regulation with Investment Cycles–The Case of Long-Lived Electricity Network Assets," EWL Working Papers 1321, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2013.
    5. Ohler, Adrienne M., 2014. "Behavior of the firm under rate-of-return regulation with two capital inputs," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(1), pages 61-69.
    6. Schober, Dominik & Weber, Christoph, 2015. "Refinancing under yardstick regulation with investment cycles: The case of long-lived electricity network assets," ZEW Discussion Papers 15-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Noel Uri, 2004. "The Impact of Incentive Regulation on Service Quality in Telecommunications in the United States," Quality & Quantity: International Journal of Methodology, Springer, vol. 38(3), pages 291-318, June.
    8. Noel Uri, 2002. "A Note on Measuring the Productivity Offset for Regulatory Purposes," Journal of Productivity Analysis, Springer, vol. 17(3), pages 201-211, May.
    9. Uri, Noel D., 2003. "The adoption of incentive regulation and its effect on technical efficiency in telecommunications in the United States," International Journal of Production Economics, Elsevier, vol. 86(1), pages 21-34, October.
    10. Uri, Noel D., 2000. "Price caps and the error in X-factor calculations," Information Economics and Policy, Elsevier, vol. 12(4), pages 329-339, December.
    11. Mellah, Thuraya & Ben Amor, Tawfik, 2016. "Performance of the Tunisian Water Utility: An input-distance function approach," Utilities Policy, Elsevier, vol. 38(C), pages 18-32.
    12. Uri, Noel D., 2001. "Changing productive efficiency in telecommunications in the United States," International Journal of Production Economics, Elsevier, vol. 72(2), pages 121-137, July.
    13. Uri, Noel D., 2001. "The effect of incentive regulation on productive efficiency in telecommunications," Journal of Policy Modeling, Elsevier, vol. 23(8), pages 825-846, November.

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