Optimal Public Utility Pricing: A Further Reconsideration

Abstract

Pricing of public utilities has long been discussed after Hotteling (1947), and most preceding arguments have provided a negative answer to the question to attain a Pareto-efficient allocation in an economy with non-convex production possibilities. Contrasting to these, Kamiya (1995) provided an argument that it is possible to devise a pricing mechanism of non-convex technology good(s) such that the equilibrium allocation under the pricing mechanism is always Pareto-efficient. The present note intends to examine a small question to find how Kamiyafs arguemnt differs from the preceding, with an intention to clarify how the efficiency property of his pricing mechanism is secured. The reconsideration however leads to a negative result that Kamiyafs pricing mechanism will fail to assure the efficiency property in a simple illustrative economy considered by himself. We first confirms that the simple example given in Kamiya contradicts his main theorem, and then review Kamiyafs proving argument and examine where any slip remains.Public utility pricing, non-convex economy, Pareto-efficient allocation