Rent Dissipation Through Electricity Prices of Publicly-Owned Utilities
A public-choice model is presented in order to explain the fact that publicly owned electricity utilities rarely price at marginal cost in practice. It is shown that if (1) government revenues are raised through proportional taxes, (2) median income is less than mean income, and (3) the share of a consumer's spending on electricity decreases with income, then the price resulting from a majority rule and universal voting is below marginal cost. The determination of a fixed subscription fee is also considered. Empirical evidence of the authors' results is obtained from pricing and consumption data for Hydro-Quebec.
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