Averch-Johnson effect

The main form of this weakness is the Averch-Johnson effect.

This is known as the Averch-Johnson effect, or the Gold-Plated-Water-Cooler effect.

The Averch-Johnson effect is the tendency of companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits.

While rate-of-return regulation is very susceptible to the Averch-Johnson effect, new forms of regulation avoid this loophole by using indexes to properly evaluate firm efficiency and use of resources.