Abstract
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. Detailed descriptions of actual regulatory processes may be useful in suggesting guides for action, since actual outcomes depend as much on political and bureaucratic necessity as they do on economic analysis and ‘rational’ benefit–cost estimates.
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