Who Pays for Fixed Costs?

Coen Teulings and Martijn Huysmans ()
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Coen Teulings: Utrecht University
Martijn Huysmans: Utrecht University

Chapter 5 in The Microeconomics of Market Failures and Institutions, 2025, pp 129-155 from Springer

Abstract: Abstract In the past 200 years railway services have been offered by private firms maximizing profits as well as by public firms operating under a regime of regulated prices, where the fixed costs are paid for from tax revenues. Chap. 4 has analysed the first of these two alternatives; this chapter analyses the second. When and why does society choose either of these alternatives? The classical criteria for a public good (excludability and non-rivalry) turn out to be of limited use, as fixed costs are non-rival anyway. Private provision with oligopoly pricing above marginal cost creates deadweight loss and may lead to inefficient entry, either too little or too much. Public provision at marginal cost avoids the deadweight loss but requires taxation, with proportional taxes discouraging labour and lump-sum taxes (such as Thatcher’s poll tax) being regressive. We stress the role of two factors: the curvature of the demand curve (convex or concave) and the information on supply and demand.

Date: 2025
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DOI: 10.1007/978-3-031-74987-2_5

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