Optimal Pricing of Publicly Supplied Private Goods: A Case Study of NIST Standard Reference Materials.
Optimal Pricing of Publicly Supplied Private Goods: A
Case Study of NIST Standard Reference Materials.
(10381 K)
Fuller, S. K.
NISTIR 6302; 154 p. June 1999.
Available from:
National Technical Information Service
(NTIS), Technology Administration, U.S. Department of
Commerce, Springfield, VA 22161.
Telephone:
1-800-553-6847 or 703-605-6000;
Fax: 703-605-6900.
Website: http://www.ntis.gov
Order number: PB99-147720
Keywords:
standard reference materials; costs; average-cost
pricing; Boiteux model; budget constraint; cost
recovery; decreasing-cost production; demand analysis;
economic analysis; inverse-elasticity rule; pricing;
multi-product enterprises; Ramsey prices; user fees;
welfare maximization
Abstract:
This study provides a framework for determining optimal
prices and production plans for a welfare-maximizing
public enterprise that produces multiple goods, faces a
budget constraint, and is obligated to meet all demand.
Public enterprises often operate under conditions of
decreasing marginal cost where first-best,
profit-maximizing rules lead to deficits. In order to
cover costs, prices therefore need to exceed marginal
cost. A public-sector pricing model in the Boiteux
tradition computes price and output combinations that
minimize the loss from charging prices that do not equal
marginal cost. The report describes the Boiteux model
and its extensions. The Ramsey version of the model is
applied to the pricing problem of the Standard Reference
Materials Program (SRMP) at the National Institute of
Standards and Technology (NET). The NIST SRMP supplies
samples of materials whose physical or chemical
properties are precisely characterized; they are used as
intermediate goods by firms and laboratories to
calibrate manufacturing equipment or scientific
apparatus for quality control. The SRMP is faced with
the problem of how to calculate prices that will cover
the cost of the program and will result in quantities
that just meet demand at those prices. The model was
applied to a group of 11 SRMs. After estimating their
demand and cost functions and combining them with the
theoretical principles of the model, optimal prices and
production plans were calculated for the group of 11
SRMs for the years 1978 to 1992. The results fulfilled
the optimality requirements of the Ramsey-Boiteux model:
Deviations of price from marginal cost were inversely
proportionate to the goods' price elasticities of
demand, and the corresponding optimal'quantities of SRMs
maintained the same proportions as the quantities that
would have been demanded at prices equal to marginal
cost. In every year of the study period there would have
been a welfare gain if Ramsey prices had been charged
rather than average-cost prices, and unit sales and
revenues would have been higher than they were under the
actual pricing policy of the SRMP in the years from 1978
to 1992. The analysis shows that in the case of NET SRMs
the Ramsey-Boiteux model can provide concrete and
relatively simple pricing rules that yield
welfare-optimizing prices and quantities.
