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Comparing Profitability in the Public Utilities, Defence and Pharmaceuticals1

Published online by Cambridge University Press:  28 November 2008

Stephen Martin  and
Keith Hartley
Stephen Martin
Affiliation:
Defence Economics, University of York, England, York YOi 5DD, Fax: 44-1904-432300
Keith Hartley
Affiliation:
Defence Economics, University of York, England, York YOi 5DD, Fax: 44-1904-432300
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Abstract

The United Kingdom's system of utility regulation – controlling prices rather than profits – is under increasing criticism. At the same time, the government continues to employ rate of return controls when purchasing from the defence and pharmaceutical industries. The existence of alternative regulatory regimes raises three questions. First, has price cap regulation enabled the UK utilities to earn excessive profits? Second, has profit regulation prevented excessive profitability in the defence and pharmaceutical industries? Third, how does profitability compare between price cap (utilities) and rate of return (defence/pharmaceuticals) regulation? Our results suggest that three of the four utilities studied have been able to earn rates of return that are considerably greater than in the corporate sector as a whole. Price caps have been far too lenient. In defence and pharmaceuticals there is less evidence of excessive profitability but these suppliers still earn 25 per cent more than comparable firms elsewhere.

Type
Articles
Information
Journal of Public Policy , Volume 17 , Issue 1 , January 1997 , pp. 81 - 105
Copyright
Copyright © Cambridge University Press 1997

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