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ACCA Applied Skills · Financial Management · The economic environment for business

A government sets a maximum price that a privatised water monopoly may increase its charges each year, equal to the rate of inflation minus an efficiency factor. Which type of regulation is this?

This is price-cap regulation, often called RPI-X. Annual price increases are limited to inflation minus an efficiency factor, which pushes the monopoly to cut costs because it keeps savings above the target. Rate-of-return regulation limits profit instead, and minimum pricing sets a floor rather than a ceiling.

  1. APrice-cap (RPI-X style) regulationCorrect
  2. BRate-of-return regulation
  3. CMinimum price regulation
  4. DCartel enforcement

Explanation

A cap on annual price increases linked to inflation less an efficiency factor is price-cap (RPI-X) regulation. It encourages cost reduction, since the firm keeps savings beyond the target. Rate-of-return regulation instead limits profit on capital employed, and minimum pricing sets a floor, not a ceiling.

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