Showing papers in "The Bell Journal of Economics and Management Science in 1971"
2,799Â citations
TL;DR: Taxation by regulation as discussed by the authors is a taxation-by-regulation approach to taxation in the regulatory process, and it can explain some otherwise perplexing features of the process and the industries subject to it, and compare it with other methods of public finance.
Abstract: Students of the regulated industries often assume that regulation is designed either to approximate the results of competition or to protect the regulated firms from competition. But neither view explains adequately a number of important phenomena of regulation and regulated industries. Foremost among them is the prevalence of "internal subsidies," whereby unremunerative services are provided, sometimes indefinitely, out of the profits from other services. To understand this phenomena, we must assign another important purpose to regulation: we can call it "taxation by regulation." The purpose of this paper is to explore the dimension of the regulatory process, to demonstrate that it explains some otherwise perplexing features of the process and the industries subject to it, and to compare it with other methods of public finance.
483Â citations
TL;DR: In this article, the authors proposed a mechanism for privately owned utilities to maintain service capability at desirable levels through establishing fixed retention rates independent of the responsive rates, with revenues in excess of or below the retention rates being paid into or made up out of an escrow fund.
Abstract: Utility prices that are made to respond appropriately to adventitious variations in demand or supply can produce substantial improvement in the efficiency of utilization of utility facilities, raising load factors and lowering average costs. More effective and less disruptive handling of emergency shortages is also facilitated. With telephone service, implementation can be on a virtually instantaneous basis through system monitoring and recorded quotation of currently effective rtes. In situations with a strong element of precommitment to the use of the service, such as airline travel, implementation can be handled through simulating a speculative market in reservations. Motivation for privately owned utilities to maintain service capability at desirable levels can be preserved through establishing fixed retention rates independent of the responsive rates, with revenues in excess of or below the retention rates being paid into or made up out of an escrow fund.
188Â citations
TL;DR: In this article, the authors developed an econometric model of the valuation of electric utility shares based on the Sharpe-Lintner capital market theory, which yields indirect estimates of the marginal rate of time preference and average risk aversion of investors in electric utilities during the period 1960-66.
Abstract: This paper develops an econometric model of the valuation of electric utility shares. This model, based upon the Sharpe-Lintner capital market theory, yields indirect estimates of the marginal rate of time preference and average risk aversion of investors in electric utility shares during the period 1960-66. In general, the empirical findings are consistent with the Sharpe-Lintner positive theory of the valuation of risk assets. Investors are found to be risk averse, and the relationship between required return and standard deviation is found to be approximately linear within the range of the sample. From a normative perspective, these estimates of the marginal rate of time preference and risk aversion are shown to yield individual firm cost of capital estimates. In a prior study of the cost of capital to the electric utility industry, Miller and Modigliani assumed that electric utilities were homogeneous with respect to operating risk. The approach employed in the present study takes explicit cognizance of intra-industry differences in operating risk. That is, each firm is considered to be in a unique "risk class," and hence to have a unique marginal cost of equity capital.
113Â citations
TL;DR: In this paper, the sign and magnitude of the bias in the accounting rate of return depend upon the depreciation schedule, the revenue timestream, the firm's growth rate, and its capital structure.
Abstract: General conditions are derived under which accounting ratios, such as the conventionally defined accounting rate of return, deviate from the economic rate of return for a firm. Cash revenue streams of arbitrary time-shape, non-depreciable capital, and corporate income taxes are considered. The sign and magnitude of the bias in the accounting rate of return depend upon the depreciation schedule, the revenue timestream, the firm's growth rate, and its capital structure.
107Â citations
TL;DR: In this article, the impact of lagged regulation on a profit-maximizing firm subject to a rate-of-return constraint is analyzed, and the effect of lag on the accomplishment of two regulatory goals: minimum-cost production and an output greater than that of an unconstrained monopoly.
Abstract: The analysis seeks to determine the impact of lagged regulation on a profit-maximizing firm subject to a rate-of-return constraint. We are particularly interested in the effect of lag on the accomplishment of two regulatory goals: minimum-cost production, and an output greater than that of an unconstrained monopoly. The extend to which these goals are reached depends on whether the fair rate of return is equal to the cost of capital or somewhat higher. If the two are equal, lagged regulation accomplishes both goals; this contrasts sharply with continuous regulation, where the firm is indifferent among all methods of production or levels of output that let it break even in its operations. If the rate of return is above the cost of capital, it will not always pay for the firm to alter its resource allocation from the overcapitalized level indicated by Averch and Johnson. There will, however, be some length of the lag interval above which the firm will overcapitalize by successively smaller amounts, with attendant increases in output from the Averch-Johnson level.
77Â citations
TL;DR: In this article, it is shown that, as all firms desire to minimize the cost of providing any given service, monopoly and competitive firms will select the same degree of durability, and that price regulation has no effect on the choice of durability unless an attempt is made to force the firm to operate in the inelastic portion of the demand curve.
Abstract: This paper reconsiders the proposition put forward by many economists that monopolies would produce less durable assets than would competitive firms. The key assumption made is that assets are desired for the services they provide. It is shown that, as all firms desire to minimize the cost of providing any given service, monopoly and competitive firms will select the same degree of durability. Although this result is proved for goods subject to exponential decay, the result can be generalized to an arbitrary decay function. A number of earlier writers reached mistaken conclusion basically because of their neglect of the initial demand for the good. Durability choice by a monopolist is unaffected by price or demand conditions so long as the firm is permitted to operate in the elastic portion of the demand curve. Price regulation will have no effect on the choice of durability unless an attempt is made to force the firm to operate in the inelastic portion of the demand curve. If this attempt is made, output will remain unchanged and costs will be increased so as to satisfy the unit cost mark-up constraint. In this case, the regulator should ensure that durability remains unaltered at the previous level.
72Â citations
TL;DR: In this article, forecasting models for the monthly inward and outward station movements of the Wisconsin Telephone Company using an iterative procedure developed by Box and Jenkins were constructed for three years from November 1966 and compared with actual observations.
Abstract: : Forecasting models are constructed for the monthly inward and outward station movements of the Wisconsin Telephone Company using an iterative procedure developed by Box and Jenkins. Data covering the period January 1951 through October 1966 were used to develop the model. Forecasts with 95% probability limits were calculated for three years from November 1966 and compared with the actual observations. The properties of the models are discussed in detail. Alternative models for forecasting are also entertained and compared with those chosen. (Author)
69Â citations
TL;DR: In this article, an econometric model is used to estimate the price responsiveness of new discoveries of natural gas, and the model is fit for the period prior to the beginning of area rate regulation of the wellhead price of naturalgas.
Abstract: This article contains the application of an econometric model to estimate the price responsiveness of new discoveries of natural gas. The model isfitfor the period prior to the beginning of area rate regulation of the wellhead price of natural gas. The theory of joint costs and the effects of dissimilar inventories of undrilled gas and oil prospects are used to explain the pattern of signs and magnitudes of the coefficients derived. These coefficients are then used to simulate discoveries for the regulatory period and the simulation is compared to the record of actual discoveries. The simulated discoveries are uniformly higher than the actual observed discoveries. A possible explanation of this result is the effect of regulation and changes in regulatory policies upon the elasticity of expectations for gas prices, and a rigorous statement of the relation is developed. We close with a general discussion of the magnitude of price increase necessary to clear the market for new gas discoveries.
67Â citations
TL;DR: In this article, the authors present a theory for price-setting in public utilities, of which public goods will be considered a special case, where a good is to be supplied to and paid for by several users, and any increase in the quantity of the good is equally available to all users.
Abstract: This paper presents a theory for price-setting in public utilities, of which public goods will be considered a special case. Both public goods and utilities are cases of joint supplies and costs, where a good is to be supplied to and paid for by several users, and any increase in the quantity of the good is equally available to all users. The pricing system proposed will be based on the idea of each user's paying the social incremental costs due to his demands. To a certain extent, Coase proposed a similar idea, but it was not worked out except in special cases. The concept has been difficult to apply due to problems in defining incremental cost when there are joint costs. A meaningful definition of social incremental cost will be given here. Where the classical assumptions hold, our theory reduces to marginal-cost pricing; however, in the case of decreasing costs, results different from marginal-cost pricing are obtained. Since users may have quite different demands, incremental-cost charges will not be uniform. However, the incremental-cost system does posses certain equity properties. Furthermore, this system of charges will cover the complete costs of supplying a public service. Finally, the concept of incremental cost implies that, at the optimum investment, the marginal unit should be charged marginal cost, which is the condition necessary for welfare maximization.
66Â citations
TL;DR: In this paper, the authors analyzed the effect of the time pattern of prices of the product of an asset on the timing of demands and the role of forecasting for optimal resource allocation.
Abstract: Depreciation policy is analyzed from the point of view of optimal inter-temporal resource allocation. Because depreciation determines the time pattern of prices of the product of an asset it affects the timing of demands. Models extended from peak-load pricing theory are used to determine rules for depreciation that are consistent with economic efficiency of asset utilization. They show how technological progress, inflation maintenance cost patterns, user costs, and other related elements should affect depreciation. The role of forecasting is considered and it is shown that in certain circumstances prediction becomes virtually unnecessary for optimal depreciation decisions.
TL;DR: A rather extensive literature has developed that analyzes the behavior of the profit-maximizing regulated firm using the model introduced by H. Averch and L.L. Johnson (A-J) as mentioned in this paper.
Abstract: A rather extensive literature has developed that analyzes the behavior of the profit-maximizing regulated firm using the model introduced by H. Averch and L.L. Johnson (A-J). Taking the value of the fair rate of return as exogenously given, this set of papers has provided a rather complete and detailed analysis of the (absolute and relative) input levels chosen by such a regulated firm and the quantity of output produced by the company.
TL;DR: In this article, the impact of such regulatory changes by means of a detailed simulation model of a typical cable TV firm is explored by using simulation models of a large-scale network.
Abstract: Recently proposed regulations by the Federal Communications Commission would allow cable television firms to import distant television signals into major urban markets, require local origination of programs by the cable system, and set minimum requirements for channel capacity, signal quality, and fees paid to copyright owners and to non-commercial television stations. This paper explores the impact of such regulatory changes by means of a detailed simulation model of a typical firm.
TL;DR: In this article, the authors investigated the development of a class of models suggested by an application of the logistic curve to model the growth of Bell System residence telephones, which allowed the potential expansion of growth to be a function of a number of economic and sociological variables, e.g., the number of households, per capita disposable income, average revenue per telephone, etc.
Abstract: This paper investigates the development of a class of models suggested by an application of the logistic curve to model the growth of Bell System residence telephones. These models are expected to be more flexible than the "S"-shaped logistic curve. They allow the "potential expansion of growth" to be a function of a number of economic and sociological variables, e.g., the number of households, per capita disposable income, average revenue per telephone, etc. This approach resulted in the development of a useful model for forecasting Bell System residence telephones.
TL;DR: The main emphasis in this article is on gas discoveries and the two broad relationships for which results are reported here - namely, discoveries and extensions and revisions - gas discovery is (qualitatively) the more important.
Abstract: The main emphasis in this study is on gas discoveries. They constitute the propelling force behind gas supply, and of the two broad relationships for which results are reported here - namely, discoveries and extensions and revisions - gas discovery is (qualitatively) the more important. Estimates for 1961-68 and 1961-69 discoveries are reported for a dynamic model, using time series of cross sections. Estimation is done first for a one-intercept model. Alternatively, the units (districts) are grouped by geological and geophysical characteristics, and estimates are derived for the grouped-districts model. This model yields generally better results. The inclusion of 1969 in the sampled period does not alter the results reported for 1961-68, and the discussion centers on the 1961-69 estimates. Conditional forecasts of 1970 discoveries indicate a drop of one-fifth to one-fourth of 1969 discoveries. The time path of the response of discoveries to the ceiling price of gas is examined, and simulation results for gas discoveries under alternative assumptions about the ceiling price of gas are reported. A procedure for combining the simulation results with available information on future gas requirements is developed to help the FPC in deciding on an appropriate level for the ceiling price of gas. Some policy implications are discussed.
TL;DR: In this article, an approach to forecasting the demand for local area telephone service is presented, which is based on adaptive exponential smoothing and is based solely on the past history of the time series involved.
Abstract: An approach to forecasting the demand for local area telephone service is presented in this paper. The specific problem discussed is the forecasting of main stations in three Michigan metropolitan areas. Several different statistical models are used. The first class of models introduced used adaptive exponential smoothing and is based solely on the past history of the time series involved. Although appropriate data at the local area level are very difficult to obtain, two exogenous time series related to household formation are used to construct more elaborate models for one of the areas. The various models are evaluated by both the average absolute and the root-mean-square forecast error. In terms of these criteria, the first class of models referred to above performs reasonably well while the second set does considerably better. This argues strongly that future improvements in forecasting accuracy will be made by the more extensive involvement of exogenous variables.
TL;DR: In this paper, the authors developed an econometric model of investment behavior for the regulated industries in the United States in which the firm faces a regulatory constraint; regulatory agencies fix the price of output on the principle of a given rate of return applied to the value of assets as determined for regulatory purposes.
Abstract: This paper develops an econometric model of investment behavior for the regulated industries in the United States In these industries the firm faces a regulatory constraint; regulatory agencies fix the price of output on the principle of a given rate of return applied to the value of assets as determined for regulatory purposes Companies are required to provide service for all consumers meeting specified conditions Regulation is effective if it produces the same price and output that would result from a competitive market structure The regulatory constraint enters into the determination of demand for capital, but replacement investment and the time structure of the investment process are the same for regulated industries as for unregulated industries
TL;DR: In this article, the authors present an economic analysis of the long-standing policy of charging minimum commissions on stock exchange transactions and conclude that minimum commissions cannot be justified on economic grounds but rather represent a form of monopolistic price-fixing.
Abstract: This article presents an economic analysis of the long-standing policy of charging minimum commissions on stock exchange transactions. The discussion draws heavily on the arguments put forward by the NYSE as a part of its recent ongoing defense of fixed commissions. These arguments fall into two categories: (1) those related to the structure of the continuous auction method, or market-making, employed by the Exchange, and (2) those related to the structure of the brokerage industry. According to the Exchange's logic, the elimination of minimum commissions would lead to a splintering of the auction market and to an increase in the concentration in the brokerage business. The analysis presented in this article leads to the conclusion that the Exchange's case is faulty in terms of both its theory and its empirical findings. It further concludes that the viability of the auction market would be somewhat improved by permitting commissions to be set on the basis of competition. In short, this article argues that minimum commission rates on stock exchange transactions cannot be justified on economic grounds but rather represent a form of monopolistic price-fixing.
TL;DR: In this paper, a share price model is derived from capital market equilibrium conditions and the effect of the time configuration of expected growth in earnings and investment on the specification of the valuation model is demonstrated.
Abstract: In this paper a share-price model is derived from capital market equilibrium conditions The effect of the time configuration of expected growth in earnings and investment on the specification of the valuation model is demonstrated An econometric model is developed and applied to cross-sectional data to estimate the required rate of return on equities of electric and gas utilities An iterative least-squares procedure is proposed for handling the value of growth in models of this form, whereby the non-linearity among the parameters in the valuation model is explicitly recognized Estimates of required rates of return on equities are obtained for a national utility sample in 1958-1969 and for firms in four regional sectors in 1963-1969 The estimated rates tend to move synchronously with bond yields over the twelve-year period, with a mean value approximately one percentage point larger than the interest rate on high grade utility bonds
TL;DR: Averch and Johnson as mentioned in this paper argued that if the rate of return allowed by the regulatory agency is greater than the cost of capital but is less than the return that would be enjoyed by the firm were it free to maximize profit without regulatory restraint, then the firm will substitute capital for the other factor of production and operate at an output where cost is not minimized.
Abstract: The central thesis under consideration is the proposition by Messrs. Harvey Averch and Leland L. Johnson that "if the rate of return allowed by the regulatory agency is greater than the cost of capital but is less than the rate of return that would be enjoyed by the firm were it free to maximize profit without regulatory restraint, then the firm will substitute capital for the other factor of production and operate at an output where cost is not minimized."
TL;DR: In this article, the optimal capital-labor ratios for firms with four different management objectives (maximum profit, return on investment, sales, and output), given that these firms are subject to four types of regulatory constraint (profit no greater than a fair return on the investment, on cost, on output, and profit no higher than some absolute upper bound), were derived.
Abstract: In their recent article, Elizabeth Bailey and John Malone deduce the optimal capital-labor ratios for firms with four different management objectives (maximum profit, return on investment, sales, and output), given that these firms are subject to four types of regulatory constraint (profit no greater than a fair return on investment, on cost, on output, and profit no greater than some absolute upper bound). This note points out some flaws in their analysis, and derives the correct results by more elementary methods.
TL;DR: The main purpose of as mentioned in this paper is to give a set of necessary conditions for the determination of the optimal switching points between peak and off-peak tariffs, with some remarks made on the number of different tariff rates and on the best level of capacity to install.
Abstract: The main purpose of this paper is to give a set of necessary conditions for the determination of the optimal switching points between peak and off-peak tariffs. Optimal tariffs are also determined, with some remarks made on the number of different tariff rates and on the best level of capacity to install. The paper concludes with a simple numerical example.
TL;DR: In this paper, the effects of combination gas-electric utilities on income redistribution and economic efficiency were assessed, and it was shown that such combinations appear to exercise greater market power than straight electric utilities.
Abstract: This paper assesses the effects of combination gas-electric utilities on income redistribution and economic efficiency. It finds that such combinations appear to exercise greater market power than straight electric utilities. A series of regression equations shows that they earn higher rates of return than straight electric companies in spite of regulation. Promotional expenditures are strikingly lower, and consumption of electricity by customers is also lower. $70 to $80 million per year is estimated to be redistributed from combinations' customers to their owners. The economic loss from the monopoly power of combinations may be on the order of $300 million per year.
TL;DR: The relationship between the decrease in the employment of firemen and the increase in rail accidents is statistically significant as mentioned in this paper, and the relationship between firemen' employment and accidents on U.S. railroads increased by 50 percent.
Abstract: In November 1963, Arbitration Award 282 allowed U.S. railroads to remove some firemen from locomotive cabs. In the following year total hours of fireman employment declined by 20 percent and by 1967 there was less than one-half the 1963-fireman hours worked. During the same period, accidents on U.S. railroads increased by 50 percent, a significant point in the labor dispute. This article seeks to establish whether the relationship between the decrease in the employment of firemen and the increase in rail accidents is statistically significant.
TL;DR: This paper uses currently available information to examine whether there are economies to be achieved if the common carriers are allowed to offer data processing services, since many of the communications and computing functions might be integrated.
Abstract: In the past few years computers and communications have become closely related. In many computer systems presently in operation it is quite difficult to separate the communications and data processing functions, while many communications systems use computers to either switch circuits or messages. This paper uses currently available information to examine whether there are economies to be achieved if the common carriers are allowed to offer data processing services, since many of the communications and computing functions might be integrated. This subject is particularly relevant in view of the recent decision of the Federal Communications Commissions to allow some of the carriers to operate arms-length data processing subsidiaries. The paper then focuses on the future when distributed computer networks will likely be a reality and poses certain policy questions which should be examined in anticipation of these developments. This discussion is preceded by a short description of communication and computing services, methods, and terminology.
TL;DR: The Ash Council's major recommendation, which it would apply to all agencies except the FCC, is to abolish the job of commissioner with a fixed term of office, and to substitute single administrators directly responsible to the President as mentioned in this paper.
Abstract: * On January 31, 1971, President Nixon released to the public a booklet entitled A New Regulatory Framework: Report on Selected Independent Regulatory Agencies. The Report represents a year's work by the President's six-member Advisory Council on Executive Organization, popularly known as the Ash Council.' The Council studied several Federal agencies: the Federal Trade Commission, the Federal Communications Commission, the Federal Power Commission, the Interstate Commerce Commission, the Securities and Exchange Commission, the Civil Aeronautics Board, and the Federal Maritime Commission. The Report notes at the outset that it is "now almost routine practice to condemn the commissions for a lack of resourcefulness, insensitivity, and for a general inability to respond effectively to the pressing problems within the scope of their responsibilities."2 The Council then recommends several major changes in the structure of our regulatory system designed to tackle these failings. The Council's major recommendation, which it would apply to all agencies except the FCC, is to abolish the job of commissioner with a fixed term of office, and to substitute single administrators directly responsible to the President. In replacing "collegial bodies" with single heads, it would hope to increase efficiency and at the same time to strengthen Executive control over, and perhaps support for, agency policies. Moreover, the adjudicatory functions of the agencies would be de-emphasized. Agency chiefs would have only 30 days to review the decisions of hearing examiners; ordinarily, cases would proceed directly to a new Administrative Court, composed of specialized judges appointed for fifteen-year terms. Finally, the Report makes several detailed recommendations concerning individual agencies. It would merge the ICC, CAB, and FMC into a single transportation agency. It would transfer the CAB's promotional, subsidy-granting activities to the Department of Transportation. It would separate the FTC's consumer-protection responsibilities from its antitrust activities, and vest the latter in a new Federal Antitrust Board with a chairman and two economist members.3 It would transfer responsibility for the Public Utility Holding
TL;DR: The NAB-JOBS program as discussed by the authors provides tax incentives for on-the-job training of the disadvantaged, which is a particularly promising objective of government policy for the disadvantaged who require a variety of special services and arrangements.
Abstract: Training on the job, an important element in the formation of human capital, is a particularly promising objective of government policy for the disadvantaged who, because they require a variety of special services and arrangements, are costly to employ initially. Presently, under the NAB-JOBS program, the Federal Government meets the additional expenses of companies that contract to place disadvantaged workers in specified job-training slots. In the last several years, a number of students and legislators, concerned with the urgency and magnitude of the problem of poverty and alleged deficiencies of the present subsidy, analogize from the Investment Tax Credit, have urged that tax incentives be provided for on-the-job training of the disadvantaged.
TL;DR: In this paper, Piron et al. presented the foregone alternative value of the allocated resources of a regulatory body for the purpose of evaluating the probable costs of regulatory actions. But the problem of computing correctly the forenon-alternative value of allocated resources was not addressed.
Abstract: Economists' advice regarding the probable costs of actions contemplated by regulated industries may not be of much practical use for regulatory commissions. The sticky point is how to compute correctly the foregone alternative value of the allocated resources. This paper was revised while the author was visiting as a Senior Research Fellow in the Department of Social and Economic Research, University of Glasgow, under a grant from the Center for Environmental Studies. The comments of Robert Piron are appreciated.