“Incentive regulation is the use of rewards and penalties to induce the utility to achieve desired goals where the utility is afforded some discretion in achieving goals.” This system replaces a command and control form of regulation.
What is a regulation in an economic system?
“Economic regulation” refers to rules that limit who can enter a business (entry controls) and what prices they may charge (price controls). For example, taxi drivers and many professionals (lawyers, accountants, beauticians, financial advisers, etc.)
How do companies benefit from incentive regulation?
For the company: Creates opportunities for maximizing earnings through internal efficiency measures: reduction in both capital and operating expenditures. Realized earnings may depart significantly from intended levels. „Excessive‟ profits could cause political backlash.
What is yardstick regulation?
When utility suppliers do not face direct competition, regulators can put pressure on those firms by basing their prices on the cost performance of comparable firms. This technique provides companies with strong incentives to cut costs, and dampens the effect of information asymmetries between companies and regulators.
What are examples of incentive regulation?
Performance-based incentive mechanisms are emerging in state regulatory jurisdictions; these new initiatives include price caps, revenue caps, yardstick regulation, and profit sharing.
What is the difference between regulation and incentive?
Sappington and Weisman (1996 : 2) defines incentive regulation as “the implementation of rules that encourage a regulated firm to achieve desired goals by granting some, but not complete, discretion to the firm”. Regulation is fundamentally a legal, not an endogenous economic construct (rules).
What is the purpose of a regulation?
The primary regulatory purpose is defined as the achievement of quality control of a subject system, its process or its product. Quality control via regulation is achieved through one or a combination of approaches: (1) accountability, (2) organizational development, (3) protectionism.
What is incentive regulation microeconomics?
Incentive regulation is the use of rewards and penalties to induce the utility to achieve desired goals where the utility is afforded some discretion in achieving goals.
What yardstick means?
1a : a graduated measuring stick three feet (0.9144 meter) long. b : a standard basis of calculation a yardstick for measuring astronomical distances. 2 : a standard for making a critical judgment : criterion measured by the yardstick of her first book was a great success by any yardstick.
