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The Theory of Public Utility Pricing and Its Application

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  • Ronald H. Coase

Abstract

In the 1930's and 1940's, the view came to be held that the right policy was to make public utility prices everywhere equal to marginal cost, even where marginal cost was less than average cost and a government subsidy was required to maintain production. This policy proposal had serious weaknesses. It did not take into account the stimulus to correct forecasting of having a subsequent market test whether consumers were willing to pay the total cost; it ignored the probably effects on the administrative structure, with state enterprise and centralized operations superceding decentralized operations; it involved a redistribution of income in favor of consumers of products produced in conditions of decreasing costs; it failed to take into account the misallocation of resources resulting from the additional taxation necessitated by the subsidies.

Suggested Citation

  • Ronald H. Coase, 1970. "The Theory of Public Utility Pricing and Its Application," Bell Journal of Economics, The RAND Corporation, vol. 1(1), pages 113-128, Spring.
  • Handle: RePEc:rje:bellje:v:1:y:1970:i:spring:p:113-128
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    References listed on IDEAS

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    1. Westfield, Fred M, 1971. "Methodology of Evaluating Economic Regulation," American Economic Review, American Economic Association, vol. 61(2), pages 211-217, May.
    2. MacAvoy, Paul W, 1971. "The Regulation-Induced Shortage of Natural Gas," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 167-199, April.
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    Cited by:

    1. Morton Kamien & Nancy Schwartz, 1972. "Exclusion costs and the provision of public goods," Public Choice, Springer, vol. 12(1), pages 43-55, March.
    2. David, Laurent & Le Breton, Michel & Merillon, Olivier, 2007. "Kolm as a Contributor to Public Utility Pricing, Second Best Culture and the Theory of Regulation," IDEI Working Papers 490, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Bowen, Richard L. & Young, Robert A., 1986. "Appraising Alternatives for Allocating and Cost Recovery for Irrigation Water in Egypt," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 1(1).
    4. Steven G. Medema, 2010. "Ronald Harry Coase," Chapters,in: The Elgar Companion to the Chicago School of Economics, chapter 2 Edward Elgar Publishing.
    5. S. Littlechild & J. Wiseman, 1986. "The political economy of restriction of choice," Public Choice, Springer, vol. 51(2), pages 161-172, January.

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