The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Averch–Johnson Effect

  • H. A. Averch
Reference work entry


The Averch–Johnson effect is produced when fair rate of return regulation encourages a firm to invest more than is consistent with the minimization of its costs. This can happen when the allowed rate of return exceeds the cost of capital, since the difference between the two represents pure profit. Detailed descriptions of actual regulatory processes may be useful in suggesting guides for action, since actual outcomes depend as much on political and bureaucratic necessity as they do on economic analysis and ‘rational’ benefit–cost estimates.


Adjustment costs Allocational efficiency Averch, H. A. Averch–Johnson effect Bounded information Bounded rationality Capital–labour ratio Cost of capital Cost–benefit analysis Electricity utilities Innovation Input–output analysis Lagrange multiplier Operational gaming Production functions Public utility pricing and finance Rate of return Rate of return regulation Regulation, political economy of Research and development Simulation Stochastic demand Technical change Technical efficiency 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • H. A. Averch
    • 1
  1. 1.