The impacts of regulation via the allowed rate of return constraint on social welfare, input choices, and level of output in the privately-owned electric utilities in the United States

This study analyzes the effect of change in price elasticity of demand for electricity on social welfare, allowed rate of return, and marginal revenue product of each input used to produce electricity. Price elasticities of demand for electricity in residential, commercial, and industrial sectors are compared as well as total demand in 1987. Also compared are these price elasticities between 1982 and 1987. Several conclusions are: (1) There is an overcapitalization in privately-owned electric utilities because at the chosen level of output, marginal revenue product of capital is less than its price. (2) Elastic demand for electricity will improve values of social welfare and marginal revenue product of inputs. (3) Tightening allowed rate of return will increase the amount of capital and labor usages, but decrease fuel, output, and social welfare. (4) Both residential and industrial demand for electricity are elastic, but commercial demand is inelastic. (5) By making comparison of price elasticity of demand between 1982 and 1987, it shows that price elasticity of demand for electricity in residential, industrial, and total demand are increasing. However, for the commercial sector, the price elasticity is decreasing somewhat