Public Finance, 4th Edition

Chapter 23: Decreasing Costs and the Theory of the Second Best—The Boiteux Problem

1. The Boiteux Problem: The Multiproduct Decreasing-Cost Firm 
   1. Analytics of the Boiteux Problem 
   2. Public Agencies and Private Markets 
   3. The U.S. Postal Service 
2. Constrained Government Agencies 
3. References 

Chapter 9 developed the three first-best decision rules for decreasing cost services:

• 1. A decreasing cost industry is a natural monopoly. The industry should consist of a single firm to minimize the total cost of producing any given output.
• 2. Price must equal marginal cost for Pareto optimality. Achieving this result requires either government regulation or government provision of the service because a profit-maximizing monopolist presumably ...