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The Zero Elasticity Rule for Pricing a Government Service: A Summary of Findings

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  • Charles F. Manski

Abstract

Government 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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  • Charles F. Manski, 1979. "The Zero Elasticity Rule for Pricing a Government Service: A Summary of Findings," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 211-223, Spring.
    • Handle: RePEc:rje:bellje:v:10:y:1979:i:spring:p:211-223
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