Chapter 23

Decreasing Costs and the Theory of the Second-Best—The Boiteux Problem


Chapter 23 extends the first-best analysis of decreasing cost services in Chapter 9 with the second-best analysis of the multiproduct, decreasing-cost firm developed by Marcel Boiteux in the 1950s. Boiteux considered how the firm should raise the prices of its products above marginal costs to remove the deficit that would arise with marginal cost pricing. The pricing rule is closely related to the optimal commodity tax rule for raising a given amount of revenue to minimize efficiency loss. Boiteux's analysis is one of the seminal contributions to second-best public expenditure theory. He is as closely associated with the decreasing-cost firm as Paul Samuelson ...

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