A Public Enterprise Pricing Primer

  • Gerald R. Faulhaber


The past decade has seen a substantial amount of scholarly activity in the US devoted to the economics of pricing in regulated (or public) enterprises subject to increasing returns to scale. More recently, this interest in public enterprise pricing has been actively shared by economists and policymakers in Europe, especially West Germany and Great Britain. While much of this work has been somewhat technical, it is aimed directly at the pricing issues of greatest concern to managers and regulators of public enterprises. In this paper, some of these pricing policy concerns are explored in a non-technical format, drawing upon the ‘new literature’ where appropriate. Our purpose here is not to report new research, but rather to consider those broad pricing issues that recur across different countries, different industries and different times, and what light economics can shed on such issues.


Marginal Cost Incremental Cost Public Utility Price Issue Public Enterprise 
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Notes and References

  1. 1.
    R. C. Levin, ‘Railroad Rates, Profitability, and Welfare Under Deregulation’, Bell J. Econ., Spring 1981.Google Scholar
  2. 2.
    Robert Willig and Elizabeth Bailey, ‘Income Distributional Concerns in Regulatory Policy-Making’, in G. Fromm (ed.), Studies in Regulation (Cambridge, Mass.: MIT Press, 1981).Google Scholar
  3. 4.
    For a precise definition and characterization of subsidy-free prices, see G. R. Faulhaber, ‘Cross-Subsidization in Public Enterprise Pricing’, American Economic Review, Dec. 1975.Google Scholar
  4. 5.
    See W. Baumol and D. Bradford, ‘Quasi-Optimal Departures from Marginal Cost Pricing’, American Economic Review, Sept. 1970.Google Scholar
  5. 7.
    The subsidy relationship between products and consumer groups is discussed in G. R. Faulhaber and S. B. Levinson, ‘Subsidy-Free Prices and Anonymous Equity’, American Economic Review, December, 1981.Google Scholar
  6. 9.
    L. Billera and D. Heath, ‘A Unique Procedure for Efficient Allocation of Shared Costs’, Technical Report # 430, School of Operations Research and Industrial Engineering, Cornell University, July, 1979.Google Scholar
  7. 10.
    It is related to similar Shapley value results of earlier work by S. C. Littlechild, ‘A Game Theoretic Approach to Public Utility Pricing’, Western Economic Journal, 1980, and E. T. Loehman and A. B. Whinston, ‘A Generalized Cost Allocation Scheme’, in S. A. Lin (ed.), Theory and Measurement of Economic Externalities, (New York: Academic Press, 1976), both of which recommend the use of the Shapley value for cost allocation, but of a ‘game’ in which the services, or goods are the ‘players’.Google Scholar
  8. 12.
    E. E. Zajac, ‘Is Telephone Service an Economic Right?’, in H. Trebing (ed.), Energy and Communications in Transition, (East Lansing: Michigan State Univ., 1981).Google Scholar
  9. 15.
    J. C. Panzar and R. D. Willig, ‘Economics of Scope’, American Economic Review, May 1981.Google Scholar

Copyright information

© Jörg Finsinger 1983

Authors and Affiliations

  • Gerald R. Faulhaber

There are no affiliations available

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