The Zero Elasticity Rule for Pricing a Government Service: A Summary of Findings
AbstractGovernment agencies often offer services or subsidies for which the demand is unknown. This paper treats the problem faced by such an agency when it must select a price-subsidy level so as to meet a budget constraint. It investigates the properties of the "zero-elasticity" pricing rule in which the agency sets an initial price, observes the resulting usage of the service, assumes that demand is totally price-inelastic and replaces the initial-price with one calculated to solve the budgetary problem, and then observes the usage that actually occurs and reapplies the zero-elasticity assumption. The paper presents analytical results on the dynamics of iterated use of the rule, particularly its convergence to a price solving the budgetary problem, and describes a case study of local transit pricing.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal Bell Journal of Economics.
Volume (Year): 10 (1979)
Issue (Month): 1 (Spring)
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Web page: http://www.rje.org
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