Principles of Microeconomics / Unit 10 MIC 0910 short lesson, about 20 seconds
Cost-Plus Against Price-Cap Regulation
Captions available
The idea
Cost-plus regulation sets price at average cost plus a normal profit, so the firm has little reason to cut costs. A price cap fixes a price for years; a firm that cuts cost keeps the gain.
In practice
A cap that declines yearly rewards the utility that finds savings.
Where people slip
A cap set too low, or hit by a cost shock, can break the firm.
Your place on the trail
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