Cw. Yang et Ja. Fox, A WELFARE ANOMALY IN THE RATE-OF-RETURN REGULATED MONOPOLY MODEL WHICH CREATES OPPORTUNITIES FOR OFFSETTING TAXATION AND REGULATORY POLICIES, Journal of regulatory economics, 6(1), 1994, pp. 59-66
The impact of the property tax on a fair rate of return regulated firm
is examined. We find that a change in the tax rate has exactly the sa
me effect on factor employment, output and hence the price as an equiv
alent change in the allowed rate of return. However, an increase in th
e allowed rate of return will lead to higher profits, whereas the same
increase in the property tax rate will decrease profits. We find that
an increase in the tax rate or allowed rate of return may result in a
net increase in social welfare. This result contradicts the long-esta
blished belief that a lower (or no) tax is preferred to a higher tax r
ate in maximizing welfare. Finally, a linear iso-welfare locus is deri
ved which creates the possibility of the regulatory agency or the tax
authority offsetting the negative effects of the other's policy.