Implications and Conclusions
The guiding research question concerns the impact of government regulation on the innovativeness of firms with market power. The investigation began in with an historical overview of the development of regulation in general and rate-of-return regulation in particular, and with a broad overview of the process and players from a typical rate hearing. A variation of the Averch-Johnson model which includes technology as a third factor of production then was outlined. Social welfare (SW) is defined as total industry consumer surplus (CS) plus total industry profit. This chapter explores an example where production is given the more specific Cobb-Douglas form. Rate-of-return regulation is shown to cause the firm to overuse capital relative to both labor and R&D, and to overuse labor augmenting R&D relative to capital augmenting R&D. On the federal level, during the 1980s the FERC moved away from rate-of-return regulation in the gas industiy, to various forms of incentive regulation.