Cross Subsidies in Public Services: Some Issues
By Paulina Beato (01/00, IFM-122, En) See also Infrastructure and Financial Markets
The past decade has seen the reform of industries that historically operated under heavy government control, giving rise to a new model of infrastructure provision. Three features characterize this new model. First, ownership, management and financing of infrastructure assets are increasingly in the hands of private sector firms. Second, the public sector exercises a regulatory function that complements the functioning of the market. Third, consumer prices cover total costs and return on investment compensates capital.
Multilateral lending institutions have issued recommendations for providing infrastructure services that take this new model into account. One of the topics covered in these recommendations is pricing policy. Pricing recommendations advocate that prices should be set to cover the total cost of the service and cross-subsidy schemes avoided. Although straightforward, the application of these recommendations to real world infrastructure services may be complex because uniform pricing may not be fully compatible with total cost coverage and welfare goals when technologies have increasing returns that may result in price discrimination and cross subsides.
This paper explores the economic literature for rules on applying these principles to concrete world infrastructure services. It constitutes an important tool for the staff of multilateral institutions as well as for national policymakers and other interested parties in ensuring that private participation in infrastructure improve access and service options for the poor.
Contents | |
| Introduction | |
| 1. Cross Subsidies and Consumer Separation: An Example | |
| 2. Price Schemes with Cross Subsidies | |
| 3. Cross Subsidies and Market Efficiency | |
| 4. Prices Should Cover Marginal Costs | |
| 5. Can Cross Subsidies Destroy Markets? | |
| 6. Regulatory Approaches | |
| 7. Conclusions | |
| Annexe | |
| References | |
Author | |
| Paulina Beato is Principal Economist in the Infrastructure and Financial Markets Division, Sustainable Development Department. | |
To order a hard copy | |
| Order your copy by sending an e-mail to: sds/ifm@iadb.org Please specify publication code, title, quantity, language and complete shipping address. Publication code: IFM-122 | |
Last updated: 05/08/07
