# Nonlinear Pricing, Redistribution, and Optimal Tax Policy

*Helmuth Cremer* () and
*Firouz Gahvari* ()

*Journal of Public Economic Theory*, 2002, vol. 4, issue 2, 139-61

**Abstract:**
This paper examines the role of nonlinear pricing by public (or regulated) utilities as a redistributive mechanism in presence of an optimal nonlinear income tax. It models an economy with many types of persons who differ in two unobservable characteristics (earning abilities and tastes). We show that nonlinear pricing does have a redistributive role; it is not a substitute for an ill-designed tax policy. We prove, assuming separable preferences, that a person whose valuation of the public sector output is smaller than the average valuation of the population (all measured at the same consumption bundle) must face a marginal price for the good above its marginal cost. Further assuming that tastes and earning abilities are perfectly correlated, we prove that everyone must face a marginal price for the public sector's output which strictly exceeds its marginal cost if correlation is positive. These properties provide an economic rationale for the provision of "support for low-income consumers" as mandated by the universal service and similar regulatory policies. Finally, we show that with correlated characteristics, implementation can be achieved through two separate functions: a pricing function that depends only on the public sector output and a tax function that depends only on income. Copyright 2002 by Blackwell Publishing Inc.

**Date:** 2002

**References:** Add references at CitEc

**Citations:** View citations in EconPapers (16) Track citations by RSS feed

**Downloads:** (external link)

http://www.blackwell-synergy.com/servlet/useragent ... &year=2002&part=null link to full text (text/html)

Access to full text is restricted to subscribers.

**Related works:**

Working Paper: Nonlinear Pricing, Redistribution and Optimal Tax Policy (1996)

This item may be available elsewhere in EconPapers: Search for items with the same title.

**Export reference:** BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text

**Persistent link:** https://EconPapers.repec.org/RePEc:bla:jpbect:v:4:y:2002:i:2:p:139-61

**Ordering information:** This journal article can be ordered from

http://www.blackwell ... bs.asp?ref=1097-3923

Access Statistics for this article

Journal of Public Economic Theory is currently edited by *Rabah Amir*, *Gareth Myles* and *Myrna Wooders*

More articles in Journal of Public Economic Theory from Association for Public Economic Theory Contact information at EDIRC.

Bibliographic data for series maintained by Wiley Content Delivery ().