Which of the following best describes the difference between cost-of-service regulation and rate-of-return regulation?
A) Costs determine prices in cost-of-service regulation and prices determine costs in rate-of-return regulation.
B) Costs determine prices in cost-of-service regulation and prices are set in rate-of-return regulation so the firm can make a normal rate of return.
C) Variable costs determine prices in cost-of-service regulation and prices are set in rate-of-return regulation so the firm can make an economic profit.
D) Regulators determine prices in cost-of-service regulation and market forces determine prices in rate-of-return regulation.
Answer: B
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