What is the fair return price rule?
For a competitive firm, profit is maximized when marginal cost ( MC ) = market price. A better regulated price would be one that allowed the monopoly to charge a price — sometimes called the fair-return price — equal to its average total cost, which in economics, also includes a normal profit.
What is the traditional rate of return regulation?
Rate of return regulation is a form of price setting regulation where governments determine the fair price which is allowed to be charged by a monopoly.
How does rate return regulation work?
A regulatory method that provides the utility with the opportunity to recover prudently incurred costs, including a fair return on investment. Revenue requirements equal Operating Costs plus the allowed rate of return times the rate base. This mechanism limits the profit (and loss) a company can earn on its investment.
How do you calculate return on rate base?
The basic formula for determining a revenue requirement is: R ≡ B • r + E + d + T where: R = revenue requirement, B = rate base, which is the amount of capital or assets the utility dedicates to providing its regulated services, r = allowed rate of return, which is the cost the utility incurs to finance its rate base.
What is the point of fair returns?
By a fair return is meant that the company will be allowed as large a return on the capital invested in its enterprise (which will be net to the company) as it would receive if it were investing the same amount in other securities possessing an attractiveness, stability and certainty equal to that of the company’s …
How can monopoly be controlled and regulated?
Monopoly will always try to fix the highest possible price which it can obtain from the customers, so as to earn minimum profit. The state can control the monopoly by fixing the profits and the prices and ensure that the industry does not earn undue profit.
What is fair return price monopoly?
Sometimes the government regulates monopoly prices. Since a price ceiling that low would cause some monopolies to incur an economic loss, a Fair Return Price is a viable alternative. The Fair Return Price is found where price equals Average Total Cost (DARP=ATC). At this price the monopoly makes a normal profit.
What is the meaning of cap price?
An upper limit set by a government, regulatory body, etc., on the price to be charged for a particular commodity or service.
What is a price regulation?
Price regulation refers to the policy of setting prices by a government agency, legal statute or regulatory authority. Under this policy, minimum and/or maximum prices may be set. Context: The bases on which regulated prices are set vary.
What is regulated rate base?
Rate base is the value of property on which a public utility is permitted to earn a specified rate of return, in accordance with rules set by a regulatory agency.
What is return on rate base?
The “rate base” is the value of the company’s assets minus accumulated depreciation. The allowed rate of return (return on assets) drives a utility’s profitability. Expenses are simply passed through, including fuel in cases where regulated utilities own power plants.
Is fair return price efficient?
Since a price ceiling that low would cause some monopolies to incur an economic loss, a Fair Return Price is a viable alternative. The Fair Return Price is found where price equals Average Total Cost (DARP=ATC). Productive Efficiency: Productive efficiency means least average cost.