Question

Critically assess the view that RPI-X regulation offers greater incentives for productive efficiency than the Rate of Return regulation

Answer 1

Rate of return regulation

In the rate of return regulation the government is the Responsible one who fix the price setting and the decides the fair price which is allowed for the monopoly to collect. The main aim behind this is that the customers must be protected from the higher prices in which the monopoly is going to charge upon them. This regulation is applicable to the companies who holds a monopoly in the market. For example in the services like electricity, telephone service, water, television cables and like that.

RPI-X regulation

Now we come to the RPI-X regulation. This regulation means that the government set prices for the monopoly, by this regulation. And this regulation is done by the formula; RPI-X. Where the RPI means the Retail Price Inflation and X has to be calculated. In this regulation the inflation is taken into account to finalize the regulation.

The regulation gives the control to regulators to set price in accordance with the current status of the industry and the expected efficiency. And also if the firm can cut the cost in large amount they can make a hike in their profit. And also it ensures the fact that the price fixed by the firm is not too high and it is only the deserved price of that particular commodity or the service offered.

Hence the price is automatically adjusts for the previous year Retail price inflation {RPI} and also depends on the expected efficiency improvements{X} at the current time. And by hence the RPI-X regulation can provide a greater incentives for productive efficiency than the Rate of return regulation.