What is the rate of return regulation
Yield regulation is a form of price setting regulation where governments determine the fair value of which can be attributed to a monopoly. It was designed to protect customers from being charged higher prices because of monopoly power and at the same time allowing the monopoly to cover its costs and earn a fair return for its owners.
Breaking down the ‘return regulation’
Yield regulation is most often used in the United States at the price of the goods and services offered by utilities, such as gas, cable TV, water, telephone and electricity. The history of antitrust sentiment and antitrust regulation led to the implementation of yield regulation in the United States, which was upheld by the Supreme Court in 1877 Munn vs Illinois state and modified in some cases since V. Ames Smith in 1898.
Yield regulation allowed clients to feel that they receive a fair price for services and allows investors to feel that they get fair return on their investments in these sectors. Yield regulation remains common in the USA for much of the 20th century gradually replaced by other more effective methods, such as the price gap regulation and cap regulation.
The advantages and disadvantages of rate of return regulation
Customers get prices that are reasonable, given the operating costs of the monopolist. Offering long-term sustainability of the course, as it provides some resistance to the betting on the popularity of the company among investors and in respect of changes which may take place in this company. This ensures stability in monopolized industries while preventing monopolies from big profits and price-gouging. Investors, before they make huge dividends, and will benefit from significant and permanent income. Clients feel like they are being overcharged for services, and the monopoly in question benefits from a stable image, as a result.
Yield regulation is often criticized because it provides little incentive to reduce costs and improve efficiency. Monopoly, which is regulated in such a way not to earn more if costs are reduced. Thus, customers can continue to pay higher prices than they would under free competition. Yield regulation may contribute to Averch-Johnson, thanks to firms regulated by the accumulation of capital and allow it to depreciate in order to destroy the system and get government permission to raise tariffs.