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Nonlinear Pricing, Redistribution and Optimal Tax Policy

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Author Info

  • Cremer, H.
  • Gahvari, F.

Abstract

This paper examines the role of nonlinear pricing by public (or regulated) utilities as a redistributive mechanism in presence of an optimal nonlinear income tax. It models an economy with many types of persons who differ in two unobservable characteristics (earning abilities and tastes). We show that nonlinear pricing does have a redistributive role; it is not a substitute for an ill-designed tax policy. We prove, assuming separable preferences, that a person whose valuation of the public sector output is smaller than the average valuation of the population (all measured at the same consumption bundle) must face a marginal price for the good above its marginal cost. Further assuming that tastes and earning abilities are perfectly correlated, we prove that everyone must face a marginal price for the public sector's output which strictly exceeds its marginal cost if correlation is positive. These properties provide an economic rationale for the provision of "support for low-income consumers" as mandated by the universal service and similar regulatory policies. Finally, we show that with correlated characteristics, implementation can be achieved through two separate functions: a pricing function that depends only on the public sector output and a tax function that depends only on income. Copyright 2002 by Blackwell Publishing Inc.

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Bibliographic Info

Paper provided by Toulouse - GREMAQ in its series Papers with number 95.393.

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Length: 19 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:fth:gremaq:95.393

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Web page: http://www-gremaq.univ-tlse1.fr/
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Keywords: TAXES; TAXATION; PUBLIC GOODS; GOVERNMENT POLICY;

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Cited by:
  1. Russo, Antonio, 2012. "Pricing of Transport Networks, Redistribution and Optimal Taxation," TSE Working Papers 12-353, Toulouse School of Economics (TSE).
  2. Gui, Benedetto & de Villemeur, Étienne, 2007. "Regulation of a Monopoly Generating Externalities," IDEI Working Papers 469, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jan 2011.
  3. Janet Currie & Firouz Gahvari, 2008. "Transfers in Cash and In-Kind: Theory Meets the Data," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 333-83, June.
  4. Andersson, Tommy, 2005. "Nonlinear Pricing and the Utility Possibility Set," Working Papers 2005:19, Lund University, Department of Economics.

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