The Zero Elasticity Rule for Pricing a Government Service: A Summary of Findings

Charles Manski

Bell Journal of Economics, 1979, vol. 10, issue 1, 211-223

Abstract: Government agencies often offer services or subsidies for which the demand is unknown. This paper treats the problem faced by such an agency when it must select a price-subsidy level so as to meet a budget constraint. It investigates the properties of the "zero-elasticity" pricing rule in which the agency sets an initial price, observes the resulting usage of the service, assumes that demand is totally price-inelastic and replaces the initial-price with one calculated to solve the budgetary problem, and then observes the usage that actually occurs and reapplies the zero-elasticity assumption. The paper presents analytical results on the dynamics of iterated use of the rule, particularly its convergence to a price solving the budgetary problem, and describes a case study of local transit pricing.

Date: 1979
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