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Regulation of Natural Monopolies and the Fair Rate of Return

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  • Hayne E. Leland

Abstract

Defining "fair return" when profits are random has been a central problem in the theory of regulation. In this paper, we develop a simple but general concept of fair return based on an equilibrium model of production under uncertainty. We propose regulatory behavior which will induce firms to make efficient input choices, while at the same time guaranteeing fair returns.
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Suggested Citation

  • Hayne E. Leland, 1973. "Regulation of Natural Monopolies and the Fair Rate of Return," Cowles Foundation Discussion Papers 362, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:362
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    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d03/d0362.pdf
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    Cited by:

    1. Wayne Y. Lee & Anjan V. Thakor, 2004. "Regulatory Pricing and Capital Investment under Asymmetric Information about Cost," Finance 0411022, University Library of Munich, Germany.
    2. Evans, Lewis & Guthrie, Graeme, 2006. "Incentive Regulation of Prices when Costs are Sunk," Working Paper Series 18971, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. Roger Buckland & Julian Williams & Janice Beecher, 2015. "Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM," Journal of Regulatory Economics, Springer, vol. 47(2), pages 117-145, April.
    4. Louis Alessi, 1974. "Aneconomic analysis of government ownership and reculation," Public Choice, Springer, vol. 19(1), pages 1-42, September.
    5. David P. Baron & Robert Taggart Jr., 1978. "Regulatory Pricing Policies and Input Choices Under Uncertainty," Discussion Papers 315, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Evans, Lewis & Guthrie, Graeme, 2003. "Asset Stranding is Inevitable: Implications for Optimal Regulatory Design," Working Paper Series 3881, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    7. repec:vuw:vuwscr:18978 is not listed on IDEAS
    8. Wayne Y. Lee & Anjan V. Thakor, 1982. "Optimal Regulatory Pricing Under Asymmetric Cost Information," Discussion Papers 580, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    9. Lewis Evans & Graeme Guthrie, 2006. "Incentive Regulation of Prices When Costs are Sunk," Journal of Regulatory Economics, Springer, vol. 29(3), pages 239-264, May.
    10. Ian Dobbs, 2011. "Modeling welfare loss asymmetries arising from uncertainty in the regulatory cost of finance," Journal of Regulatory Economics, Springer, vol. 39(1), pages 1-28, February.
    11. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada [Checking the conditions of efficient production in Bell Canada]," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.
    12. David P. Baron, 1977. "On the Relationship Between Complete and Incomplete Financial Markets Models," Discussion Papers 241, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    13. repec:vuw:vuwscr:18971 is not listed on IDEAS
    14. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.
    15. Evans, Lewis & Guthrie, Graeme, 2003. "Asset Stranding is Inevitable: Implications for Optimal Regulatory Design," Working Paper Series 18978, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    16. Kalu, Timothy Ch. U., 1995. "A uniform profit margin policy and its effects on mineral producing firms The case of the oil industry," Resources Policy, Elsevier, vol. 21(1), pages 61-72, March.
    17. Sebastian Nick & Heike Wetzel, 2016. "The hidden cost of investment: the impact of adjustment costs on firm performance measurement and regulation," Journal of Regulatory Economics, Springer, vol. 49(1), pages 33-55, February.

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