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In: Economics

In the Davis & Muehlegger (2010) analysis of pricing above marginal cost under regulation, they observe...

In the Davis & Muehlegger (2010) analysis of pricing above marginal cost under regulation, they observe that

"... decreased consumption along the intensive margin is not costly from the regulated firm’s perspective because the rate base does not depend on the level of natural gas consumption per customer. In short, under traditional rate-of-return regulation a regulated firm attempts to maximize the rate base, and this creates incentive for firms to lobby regulators for low fixed fees.” (p. 803)

In 2-3 sentences, explain what they mean, based on their analysis. Why does traditional ROR regulation provide this incentive?

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Rahul Sunny answered 2 years ago
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