Capital Waste in the Rate-of-Return Regulated Firm

Roger Sherman

Journal of Regulatory Economics, 1992, vol. 4, issue 2, 197-204

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. Copyright 1992 by Kluwer Academic Publishers

Date: 1992
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