Administered prices should deviate from marginal cost if they are to be used as instruments to generate revenue. The analysis is based on the Bank's two-step approach to public sector pricing: first calculating marginal cost, and then adjusting it to account for other factors. The aim is to show how those adjustments should be made to account for fiscal concerns. The appropriate basis for pricing in the first step, the author contends, is a weighted average of short and long term marginal costs. Deviations from marginal cost in the second step are shown to depend on their revenue raising, distortionary, and distributional effects. The author argues that it is better to raise prices above marginal cost through taxes than by raising the price received by the enterprise. The author describes how to set charges in the face of metering difficulties, stressing the need to set unifrom charges and to make indirect charges on inputs.
Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Markets and Market Access,Access to Markets
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