BEHAVIOR OF THE FIRM UNDER REGULATORY CONSTRAINT

Abstract

A recent article by Akira Takayama discusses an earlier paper by Harvey Averch and Leland L. Johnson on fair rate of return regulation of public utilities. Although Takayama (p. 255) agrees with Averch and Johnson's general conclusions a firm will tend to increase its investment with the introduction of an active constraint on its rate of return, he criticizes the argument as being confusing, ambiguous, and in error. Takayama then attempts a clarification, and presents a new formulation which leads to the result quoted above. This comment will discuss several of Takayama's criticisms in addition to showing that the so-called A-J cannot be derived from the basic assumptions made by both Averch and Johnson and Takayama.1 We will show that the very assumptions used to prove the Effect, by defining the region of X, require an assumption that the Effect exists in the first place.