Capital waste in the rate-of-return regulated firm

descriptionPublicationkeyboard_double_arrow_right Article 01 Jun 1992 English Publisher:Springer Science and Business Media LLCJournal:Journal of Regulatory Economics, volume 4, pages 197-204 (issn: 0922-680X, eissn: 1573-0468,

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Authors: Roger Sherman;

doi: 10.1007/bf00157165

Capital waste in the rate-of-return regulated firm

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Abstract

Here it is shown how capital waste can be motivated under rate-of-return regulation, even when the marginal product of capital is positive. This result means that the sign of the marginal product of capital is not adequate as a basis for defining waste. The wasteful use of capital is motivated to avoid an inelastic region of demand, and involves pricing as well as technical input decisions of the firm.

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University of Virginia
United States

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