A Test of Relative and Absolute Price Efficiency in Regulated Utilities

A model is developed that provides for tests for all types of relative price inefficiency, rather than just for the Averch-Johnson effect. The Averch-Johnson effect states that effective rate of return regulation results in relative price inefficiency because it induces a profit maximizing utility t...

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Bibliographic Details
Published in:The review of economics and statistics 1980-02, Vol.62 (1), p.81-88
Main Authors: Atkinson, Scott E., Halvorsen, Robert
Format: Article
Language:English
Subjects:
Cost efficiency
Efficiency
Fuel efficiency
Government regulation
Impacts
Industrial regulation
Minimization of cost
Normal profits
Price efficiency
Price level changes
Prices
Public utilities
Rates of return
Regulated industries
Regulation
Relative prices
Tests
Utilities
Utility rates
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Summary:A model is developed that provides for tests for all types of relative price inefficiency, rather than just for the Averch-Johnson effect. The Averch-Johnson effect states that effective rate of return regulation results in relative price inefficiency because it induces a profit maximizing utility to use more than the cost minimizing amount of capital relative to labor.The empirical results indicate that input choice in regulated utilities is affected significantly both by distortions of the Averch-Johnson type and by distortions resulting from the existence of fuel adjustment clauses. Since the distortions are partly offsetting, it is not clear whether the overall level of efficiency of firms subject to rate of return regulation is increased or decreased by the existence of fuel adjustment clauses.
ISSN:0034-6535
1530-9142
DOI:10.2307/1924275