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  • Regulations Lect8 Exercise

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    A regulated natural monopolist faces different incentives under various regulatory schemes. Rate-of-return regulation provides weak incentives to lower costs but incentives to improve quality or overcapitalize. Price-cap regulation and combining price-cap regulation with performance standards provide incentives to lower costs while also incentivizing improvements to quality. Yardstick regulation and earnings sharing provide incentives to lower costs but it is unclear if they incentivize quality improvements and they do not incentivize overcapitalization.

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    A regulated natural monopolist faces different incentives under various regulatory schemes. Rate-of-return regulation provides weak incentives to lower costs but incentives to improve quality or overcapitalize. Price-cap regulation and combining price-cap regulation with performance standards provide incentives to lower costs while also incentivizing improvements to quality. Yardstick regulation and earnings sharing provide incentives to lower costs but it is unclear if they incentivize quality improvements and they do not incentivize overcapitalization.

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    13 views1 page

    Regulations Lect8 Exercise

    Uploaded by

    behe
    A regulated natural monopolist faces different incentives under various regulatory schemes. Rate-of-return regulation provides weak incentives to lower costs but incentives to improve quality or overcapitalize. Price-cap regulation and combining price-cap regulation with performance standards provide incentives to lower costs while also incentivizing improvements to quality. Yardstick regulation and earnings sharing provide incentives to lower costs but it is unclear if they incentivize quality improvements and they do not incentivize overcapitalization.

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    Does a regulated natural monopolist…

    Have incentives to Have incentives to Have incentives to Have price some


    lower costs improves quality overcapitalize flexibility
     
    Rate-or-return regulation Weak Yes Yes No
    Price-cap regulation
     Yes  No No  Yes 
    Performance standard (quality)
     Unclear Yes  No  N/A 
    Earning sharing
     Yes Unclear  No  No 
    Yardstick regulation
     Yes Unclear  No  No 
    Price-cap regulation and performance
    standard
     Yes Yes  No  Yes 

    Note: Possible answers are Yes, No, or Unclear. If the answer is Yes, you may also indicate whether the incentives are Strong or Weak.

    If they improve quality or overcapitalize then they would have to cover the cost.

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