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On Intertemporal Subsidy-Free Prices and Economic Depreciation: Constrained Market Pricing Revisited

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  • Gunn, Calum

Abstract

The constrained market pricing approach to regulating monopolies maintains that prices should be "subsidy-free", lying between the often expansive bounds of stand alone and incremental costs. For a simple two-good/two-period model of a monopolist subject to a zero profit constraint, it is shown that subsidy-free prices are those which rise to the amortized opportunity cost of the currently optimal asset configuration required to meet both current and future demand, providing--in some circumstances--justification for accelerated depreciation. Such intertemporal subsidy-free prices recognize that the stand alone cost of existing assets to current consumers depends on the value of those assets to future consumers. Hence, if a feasible resale price for the fixed costs of capacity exists within or between periods, then intertemporal stand alone costs and intertemporal incremental costs are driven to equality. Copyright 2003 by Kluwer Academic Publishers

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  • Gunn, Calum, 2003. "On Intertemporal Subsidy-Free Prices and Economic Depreciation: Constrained Market Pricing Revisited," Journal of Regulatory Economics, Springer, vol. 24(2), pages 135-159, September.
  • Handle: RePEc:kap:regeco:v:24:y:2003:i:2:p:135-59
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    Cited by:

    1. Evans, Lewis & Guthrie, Graeme, 2003. "Asset Stranding is Inevitable: Implications for Optimal Regulatory Design," Working Paper Series 3881, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    2. repec:vuw:vuwscr:18978 is not listed on IDEAS
    3. Evans, Lewis & Guthrie, Graeme, 2003. "Asset Stranding is Inevitable: Implications for Optimal Regulatory Design," Working Paper Series 18978, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.

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