rate of return regulation

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A system for controlling the prices charged by regulated monopolists. Rate of return regulation sets prices at a level that allows the monopolist to earn the market return on its capital. Rate of return regulation has the adverse consequence of encouraging increases in costs since these define the capital base on which the return is calculated (the Averch–Johnson effect). Rate of return regulation has mostly been superseded by price-cap regulation. See also utility.

Subjects: Economics.

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