Averch johnson effect rate of return regulation

The Averch-Johnson E ect Economics of Competition and Monopoly 1 Rate of Return Regulation This form of regulation in its purest form takes costs as exogenous and observ-able and forms prices on the basis of observed costs included and appropriate rate of return on capital. Economics Letters 11 (1983) 279-283 279 North-Holland Publishing Company A GENERAL ANALYSIS OF THE AVERCH-JOHNSON EFFECT Michael L. KATZ Princeton University, Princeton, NJ 08544, USA Received 30 August 1982 This note provides general proofs of the basic results concerning the effects of rate-of-return regulation on factor use and output levels. The Averch-Johnson Effect Averch and Johnson developed a model to illustrate that public regulation creates an incentive for the firm to over-invest in tangible assets. Since the "allowed profit" is based on the rate base (RB), the firm has an incentive to augment its capital stock. H. Averch and L. Johnson.

Rate of return regulation can contribute to the Averch-Johnson effect, whereby firms thus regulated accumulate capital and allow it to depreciate in order to subvert the system and obtain Averch-Johnson effect, estimation of the de-rived demand function provides direct tests of the related proportions that the regulated monopolist's capital-labor ratio will increase if the allowed rate of return is decreased (regulation is tightened), and that rising costs of non-base inputs will cause the firm to produce more efficiently. The Averch–Johnson effect is produced when fair rate of return regulation encourages a firm to invest more than is consistent with the minimization of its costs. This can happen when the allowed rate of return exceeds the cost of capital, since the difference between the two represents pure profit. The Averch–Johnson effect is the tendency of regulated companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies' profits to capital ratio is regulated at a certain percentage then there is a strong incentive for companies to over-invest in order to increase profits overall. This investment goes beyond any optimal efficiency Since the Averch-Johnson effect is strongly associated with the rate of return regulation, it is worth to examine whether and to what extent the Nordic revenue cap approach discussed in Section 2 is subject to a similar capital bias. Eleven years ago, Harvey Averch and Leland Johnson demonstrated that firms subject to rate of return regulation have an incentive to use inputs in proportions that differ from the cost minimizing There are always Averch-Johnson (A-J) effects under type I regulation, but not necessarily under type II regulation. (3) It re-derives the A-J effect under certainty by a new and nontechnical approach, without using the Lagrangian multiplier. JEL Classification Number: D42, L51 Keywords: Monopoly, rate of return, regulation, uncertainty

2 Aug 2018 Rate-of-Return Regulation to Unlock Natural Gas Pipeline stage by the application of RoR regulation (i.e., the Averch-Johnson effect).

The Averch–Johnson effect is the tendency of regulated companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies' profits to capital ratio is regulated at a certain percentage then there is a strong incentive for companies to over-invest in order to increase profits overall. This investment goes beyond any optimal efficiency Since the Averch-Johnson effect is strongly associated with the rate of return regulation, it is worth to examine whether and to what extent the Nordic revenue cap approach discussed in Section 2 is subject to a similar capital bias. Eleven years ago, Harvey Averch and Leland Johnson demonstrated that firms subject to rate of return regulation have an incentive to use inputs in proportions that differ from the cost minimizing There are always Averch-Johnson (A-J) effects under type I regulation, but not necessarily under type II regulation. (3) It re-derives the A-J effect under certainty by a new and nontechnical approach, without using the Lagrangian multiplier. JEL Classification Number: D42, L51 Keywords: Monopoly, rate of return, regulation, uncertainty The Averch-Johnson E ect Economics of Competition and Monopoly 1 Rate of Return Regulation This form of regulation in its purest form takes costs as exogenous and observ-able and forms prices on the basis of observed costs included and appropriate rate of return on capital. Economics Letters 11 (1983) 279-283 279 North-Holland Publishing Company A GENERAL ANALYSIS OF THE AVERCH-JOHNSON EFFECT Michael L. KATZ Princeton University, Princeton, NJ 08544, USA Received 30 August 1982 This note provides general proofs of the basic results concerning the effects of rate-of-return regulation on factor use and output levels. The Averch-Johnson Effect Averch and Johnson developed a model to illustrate that public regulation creates an incentive for the firm to over-invest in tangible assets. Since the "allowed profit" is based on the rate base (RB), the firm has an incentive to augment its capital stock. H. Averch and L. Johnson.

30 Sep 2018 The regulatory asset base Rate of return and cost-plus regulation 17 This is referred to as the Averch-Johnson effect, after Averch, H and 

The Averch–Johnson effect is produced when fair rate of return regulation encourages a firm to invest more than is consistent with the minimization of its costs. This can happen when the allowed rate of return exceeds the cost of capital, since the difference between the two represents pure profit. The Averch–Johnson effect is the tendency of regulated companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies' profits to capital ratio is regulated at a certain percentage then there is a strong incentive for companies to over-invest in order to increase profits overall. This investment goes beyond any optimal efficiency Since the Averch-Johnson effect is strongly associated with the rate of return regulation, it is worth to examine whether and to what extent the Nordic revenue cap approach discussed in Section 2 is subject to a similar capital bias. Eleven years ago, Harvey Averch and Leland Johnson demonstrated that firms subject to rate of return regulation have an incentive to use inputs in proportions that differ from the cost minimizing There are always Averch-Johnson (A-J) effects under type I regulation, but not necessarily under type II regulation. (3) It re-derives the A-J effect under certainty by a new and nontechnical approach, without using the Lagrangian multiplier. JEL Classification Number: D42, L51 Keywords: Monopoly, rate of return, regulation, uncertainty

30 May 2019 HOW HARMFUL IS THE RATE OF RETURN REGULATION? AVERCH- JOHNSON CRITIQUE REVISITED. Timo Kuosmanen, presenter, Aalto 

Averch-Johnson effect (3). However, rate of return regulation is also generally viewed as having the advantage of restricting opportunities for regulators to arbitrarily lower companies’ prices. 1 Rate base is the gross value of the company’s assets, minus accumulated depreciation. The Averch-Johnson E ect Economics of Competition and Monopoly 1 Rate of Return Regulation This form of regulation in its purest form takes costs as exogenous and observ-able and forms prices on the basis of observed costs included and appropriate rate of return on capital. One of the principal criticisms that have arisen for the kind of rate of return

2.1 Averch –Johnson effect. – 2.2 The rate of return regulation under profit and revenue maximization. – 2.3 Welfare aspects of a regulation. • 3. The rate of 

The Averch–Johnson effect is the tendency of regulated companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies' profits to capital ratio is regulated at a certain percentage then Excessive capital accumulation under rate of return regulation is informally 

The Averch–Johnson effect is the tendency of regulated companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies' profits to capital ratio is regulated at a certain percentage then there is a strong incentive for companies to over-invest in order to increase profits overall. This investment goes beyond any optimal efficiency point for capital that the company may have calculated as higher profit is almost always desired