Political Economy and the Marginal Cost Pricing Controversy

Jean‐Jacques Laffont

in Incentives and Political Economy

Published in print October 2001 | ISBN: 9780199248681
Published online November 2003 | e-ISBN: 9780191596575 | DOI:

Series: Clarendon Lectures in Economics

 Political Economy and the Marginal Cost Pricing Controversy

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This chapter traces the intellectual history of the marginal cost‐pricing rule from Adam Smith to Hotelling. A democratic game is modelled under imperfect information and incentive constraints and it is shown that the rent captured by the majority is very costly to the other group. As a result, the politician–economist relationship is shown to be welfare enhancing if the economist recommends rules that decrease the politician's discretion even at the cost of efficiency.

Keywords: democracy; discretion; efficiency; Harold Hotelling; imperfect information; incentive constraints; marginal cost pricing; political majority; Adam Smith

Chapter.  8900 words.  Illustrated.

Subjects: Microeconomics

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