Price Regulation and the Cost of Capital

Fernando Tavares Camacho () and Flavio Marques Menezes ()

No 413, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This paper investigates how price regulation under moral hazard can affect a regulated firm’s cost of capital. We consider stylised versions of the two most typical regulatory frameworks that have been applied over the last decades by regulators: Price Cap and Cost of Service. We show that there is a trade-off between lower operational costs and a higher cost of capital under Price Cap regulation and higher operational costs and lower cost of capital under Cost of Service regulation. As a result, when the extent of moral hazard is not significant, Price Cap regulation generates lower welfare than the Cost of Service regulation.

New Economics Papers: this item is included in nep-bec and nep-reg
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.uq.edu.au/economics/abstract/413.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:qld:uq2004:413

Access Statistics for this paper

More papers in Discussion Papers Series from University of Queensland, School of Economics
Contact information at EDIRC.
Series data maintained by Randal Anderson ().