Public Enterprise Pricing, Taxation and Market Structure

It is possible to identify two distinct approaches to the problem of how to set pricing rules for public enterprise. The first, typified by the paper of Baumol and Bradford (1970), regards the problem as identical to that of setting optimal taxes. The second, first expounded in the paper of Boiteux (1956), recognises that in practice, and for a variety of reasons, governments impose budget constraints upon public enterprises, and that peicing of public sector outputs is quite likely to be determined independently of the tax structure. Our aim is to focus on the latter approach, paying particular attention to an aspect of the problem which has been somewhat neglected. We wish to take account of the fact that when a public enterprise adjusts prices, there are general equilibrium repercussions which take place in the private sector. These effects can be neglected by resorting to the expedient of assuming constant producer prices. This assumption would be inconsistent with the existence of pure profit in a competitive private sector, which is one of the cases we analyse. We consider also the implications of having a monopolistically competitive private sector, and as a polar case the situation where a single many-output monopolistic operates in the private sector.