A Test of Relative and Absolute Price Efficiency in Regulated Utilities

Abstract

A model for testing all types of relative price inefficiency expands the Averch-Johnson effect and makes it possible to test for absolute price efficiency, which exists if the value of the marginal product for each factor is equated to factor price and implies both cost minimization and production of the optimal quantity of output. Duality theory is used to derive the empirical model using 1973 data for electric utilities. The results indicate that relative and absolute price efficiency were generally not achieved by electric utilities in that year. 36 references, 1 table.