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Increasing Returns and Decentralization Rules for the Public Sector

Richard Arnott () and Richard Harris

Working Paper from Economics Department, Queen's University

Abstract: This paper reviews Guesnerie's analysis that proved the marginal cost pricing doctrine was valid for firms with production sets which are convex and allow for certain types of non-convexities. We demonstrate the validity of his conjecture, and develop additional decentralization rules with non-convexities. The results imply most of the conventional wisdom concerning public sector rules with increasing returns, for instance pricing policy for public utilities and the use of cost-benefit analysis in evaluating public projects, must be strongly qualified.

Date: 1976
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