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Common Costs And Cross‐Subsidies: Misestimation Versus Misallocation

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  • MARK L. BURTON
  • DAVID L. KASERMAN
  • JOHN W. MAYO

Abstract

Existing models of cross‐subsidization have focused on either ex ante distortions to investments or misallocations of common costs as the principal sources of cross‐subsidies in regulated firms. In this paper, we identify a third vehicle for such cross‐subsidization that, given regulators’ preferences, is not only likely but likely to be prominent; namely, the misestimation of the magnitude of common costs. Because our results incorporate regulators’ preferences, they may provide the necessary building block for a positive theory of the magnitude of observed common costs that has, heretofore, been absent in the literature. (JEL L51, L97)

Suggested Citation

  • Mark L. Burton & David L. Kaserman & John W. Mayo, 2009. "Common Costs And Cross‐Subsidies: Misestimation Versus Misallocation," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 193-199, April.
    • Handle: RePEc:bla:coecpo:v:27:y:2009:i:2:p:193-199
    DOI: 10.1111/j.1465-7287.2008.00116.x
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    References listed on IDEAS

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    2. Cavalluzzo, KS & Ittner, CD & Larcker, DF, 1998. "Competition, efficiency, and cost allocation in government agencies: Evidence on the Federal Reserve System," Journal of Accounting Research, Wiley Blackwell, vol. 36(1), pages 1-32.
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    4. T. Randolph Beard & David L. Kaserman & John W. Mayo, 2003. "A Graphical Exposition of the Economic Theory of Regulation," Economic Inquiry, Western Economic Association International, vol. 41(4), pages 592-606, October.
    5. Eriksson, Ross C & Kaserman, David L & Mayo, John W, 1998. "Targeted and Untargeted Subsidy Schemes: Evidence from Postdivestiture Efforts to Promote Universal Telephone Service," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 477-502, October.
    6. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    7. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
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    9. Baumol, William J, 1996. "Predation and the Logic of the Average Variable Cost Test," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 49-72, April.
    10. Brennan, Timothy J, 1990. "Cross-Subsidization and Cost Misallocation by Regulated Monopolists," Journal of Regulatory Economics, Springer, vol. 2(1), pages 37-51, March.
    11. Ronald R. Braeutigam, 1980. "An Analysis of Fully Distributed Cost Pricing in Regulated Industries," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 182-196, Spring.
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    2. Gregory Rosston & Michael Topper, "undated". "An Antitrust Analysis of the Case for Wireless Network Neutrality," Discussion Papers 08-040, Stanford Institute for Economic Policy Research.

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    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General

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