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Rate-of-Return Regulation and Two-Part Tariffs

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  • Roger Sherman
  • Michael Visscher

Abstract

In choosing a two-part tariff, a monopoly subject to rate-of-return regulation will rely more on demand elasticities and less on marginal costs than would a welfare-maximizing firm. The rate-of-return regulated firm also will reduce its access fee or its marginal usage fee more, depending on whether adding consumers or increasing output requires marginally the most capital. In the typical case these effects will favor declining-block rate structures, which helps to explain their widespread use by rate-of-return regulated firms.

Suggested Citation

  • Roger Sherman & Michael Visscher, 1982. "Rate-of-Return Regulation and Two-Part Tariffs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(1), pages 27-42.
    • Handle: RePEc:oup:qjecon:v:97:y:1982:i:1:p:27-42.
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Amrstong, Mark & Cowan, Simon & Vickers, John, 1995. "Nonlinear pricing and price cap regulation," Journal of Public Economics, Elsevier, vol. 58(1), pages 33-55, September.
    2. Lucas W. Davis & Erich Muehlegger, 2010. "Do Americans consume too little natural gas? An empirical test of marginal cost pricing," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 791-810, December.
    3. Murray Fulton & James Vercammen, 2014. "Optimal NGO Financing of a Resource Management Certification Scheme," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 58(4), pages 605-626, August.
    4. Severin Borenstein & Lucas W. Davis, 2012. "The Equity and Efficiency of Two-Part Tariffs in U.S. Natural Gas Markets," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 75-128.
    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. Oliver, Matthew E., 2019. "Pricing flexibility under rate-of-return regulation: Effects on network infrastructure investment," Economic Modelling, Elsevier, vol. 78(C), pages 150-161.
    7. Sherman, Roger, 1989. "Institutional design for monopoly regulation," European Journal of Political Economy, Elsevier, vol. 5(2-3), pages 245-257.

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