Publication: Price Structures, Cross-Subsidies, and Competition in Infrastructure
Date
1997-02
ISSN
Published
1997-02
Author(s)
Abstract
Governments often regulate not only the
overall level of prices charged by infrastructure firms but
also the relationship between prices for different services
or customers. Prices can differ among different types of
customers, even when no customers can be said to be
subsidizing another, for example, when one asset is used to
supply a service to two or more groups of customers. One of
the hurdles that governments must overcome in introducing
competition in infrastructure is dealing with the social and
political implications of changing price structures, or rate
rebalancing. Generally, competition should reduce overall
costs in the sector, lessening the need to compensate groups
hurt by price increases resulting from rate rebalancing.
But if the efficiency gains are not enough to offset the
price increases for some groups and the government is
worried about the political and social costs of rate
balancing, it has three basic options: 1) preserving the
old price structure; 2) funding price subsidies from general
tax revenue rather than from transfers within the firm or
industry; and 3) relying on social safety nets rather than
price subsidies. Whichever option a government chooses
should stand up against the following four tests: 1) Do
subsidies reach the people the government most wants to
support? 2) are the costs clear and measurable? 3) Are the
administrative costs as low as possible? 4) Is the revenue
raised from the source that entails the least cost to the
economy? This Note looks at the three options in practice
and reviews how they measure up against the four criteria.
It concludes that governments should eliminate price
subsidies if politically feasible. But even if they cannot,
they can still reap the benefits of competition.
Citation
“Irwin, Timothy. 1997. Price Structures, Cross-Subsidies, and Competition in Infrastructure. Viewpoint: Public Policy for the Private Sector; Note No. 107. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/afa5ed20-04d2-525b-b158-68bd263a2f85 License: CC BY 3.0 IGO.”
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