Behavior of the Firm Under Regulatory Constraint.

This article focuses on the behavior of a firm under regulatory constraint. It is assumed that the regulated rate of return exceeds the market rate of interest but is below the unregulated rate of return. If the ownership of the public utility were sold in a highly competitive securities market, the purchaser could not expect to earn the monopoly profits. Suppose that the sellers exchanged their ownership rights for bonds, which become the liabilities of the new owners. No change would occur in the scale of plant or rate of output, since quasi rents were already maximal. After the sale, the new owners of the firm earn no monopoly profits.