Property Rights, Equity and Public Utility Pricing

  • Warren J. Samuels


Most discussions of public utility pricing are either theoretical or normative. The former explore the substantive economic significance or the analytical implications of particular pricing systems; the latter explore the structure or the functions (goals) of ideal public utility pricing. The one describes what would transpire under a pricing system; the other prescribes what should happen through public utility pricing.


Marginal Cost Public Choice Price System Rate Structure Public Utility 


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  1. 1.
    The authors acknowledge the important suggestions made by Harry Trebing and Allan Schmid in response to an earlier draft of the article. This essay is an extension of WJ. Samuels, ‘Theory of Regulation in Relation to Return’, Public Utilities Fortnightly, vol. 80 (9 and 23 November and 7 December 1967) pp. 47–60; 34–41; 33–39; ‘Externalities, Rate Structure, and the Theory of Public Utility Regulation’, in Essays in Public Utility Pricing and Regulation, edited by H. M. Trebing (East Lansing: Division of Research, Michigan State University, 1971) pp. 357–94; ‘Public Utilities and the Theory of Power’, in Milton Russell (ed.) Perspectives in Public Regulation, (Carbondale: Southern Illinois University Press, 1973); and an extension and application of the analysis undertaken inGoogle Scholar
  2. 1a.
    WJ. Samuels, ‘The Coase Theorem and the Study of Law and Economics’, Natural Resources Journal, vol. 14 (January 1974) pp. 61–148; and ‘An Economic Perspective on the Compensation Problem’, Wayne Law Review, vol. 21 (November 1974) pp. 113–34.Google Scholar
  3. 2.
    According to Richard Posner, neithér the relevant previously existing theories nor the present theory have ‘been refined to the point where [they] can generate hypotheses sufficiently precise to be verified empirically’ — although there is considerable empirical evidence in support of the present theory and (at least some versions of) the theory of economic regulation. RA Posner, ‘Theories of Economic Regulation’, Bell Journal of Economics and Management Science, vol. 5 (Autumn 1974) p. 356.See also Mark V. Pauly, ‘Comments’ in Russell (ed.) Perspectives in Public Regulation, pp. 27–33; and Samuels, ‘Public Utilities and the Theory of Power’, pp. 24–7. These theories are more in the nature of paradigms. Apropos the socalled economic theory of regulation, it is applicable only within (1) the dynamics of institutional development for the public utility institution as a whole, of which, constrained maximization is an important part, and (2) the dynamics of rights, with rights as both dependent and independent variables, of which, again, constrained maximization is an important part, but in both respects only an important part (see Samuels, ‘Public Utilities and the Theory of Power’, pp. 16ff). An appropriate problem for research is whether management’s behavioural principle is the same regardless of property right system, for example, whether privately or publicly owned utilities have higher costs, including consideration of A-J effects.CrossRefGoogle Scholar
  4. 2a.
    On the latter, see Robert A. Meyer, ‘Publicly Owned Versus Privately Owned Utilities: A Policy Choice’, Review of Economics and Statistics, vol. 57 (November 1975) pp. 391–9.CrossRefGoogle Scholar
  5. 2b.
    See also Marc J. Roberts, ‘An Evolutionary View of the Behavior of Public and Private Companies’, American Economic Review, Papers and Proceedings, vol. 65 (May 1975) pp. 415–27;Google Scholar
  6. 2c.
    and Louis De Alessi, ‘An Economic Analysis of Government Ownership and Regulation: Theory and the Evidence from the Electric Power Industry’, Public Choice, vol. 19 (Fall 1974) pp. 1–42.CrossRefGoogle Scholar
  7. 5.
    Samuels, ‘Theory of Regulation in Relation to Return’, 9 November 1967, p. 53.Google Scholar
  8. 6.
    Samuels, ‘Public Utilities and the Theory of Power’, pp. 8ff; Journal of Economic Issues, vol. 8 (June 1974) pp. 217, 222 and passim. Google Scholar
  9. 6a.
    Harry M. Trebing, ‘Realism and Relevance in Public Utility Regulation’, Journal of Economic Issues, vol. 8 (June 1974) pp. 217, 222 and passim. Google Scholar
  10. 8.
    For an exploration of this ambivalence in regard to valuation, see W. J. Samuels, ‘On the Effect of Regulation on Value’, National Tax Journal, vol. 25 (June 1972) pp. 311–19; also in Public Utilities Fortnightly, vol. 88 (2 September 1971) pp. 21–29.Google Scholar
  11. 8a.
    See also W. J. Samuels, ‘Regulation and Valuation’, Public Utilities Fortnightly, vol. 96 (17 July 1975) pp. 17–20.Google Scholar
  12. 9.
    Mark J. Green, ‘Appropriateness and Responsiveness: Can the Government Protect the Consumer?’, Journal of Economic Issues, vol. 8 (June 1974) p. 326, n. 28.Google Scholar
  13. 12.
    Roger Sherman, ‘The Design of Public Utility Institutions’, Land Economics, vol. 46 (February 1970) pp. 54, 55.CrossRefGoogle Scholar
  14. 13.
    Ibid., p. 58. On the question of who is to decide effective recognition of interests through implicit rights, see Harry M. Trebing, ‘Government Regulation and Modern Capitalism’, Journal of Economic Issues, vol. 3 (March 1969) p. 109, passim. Google Scholar
  15. 14.
    The analysis of rights and opportunity sets developed in this section is based in part upon the following by Samuels, ‘Welfare Economics, Power and Property’, in Gene Wunderlich and W. L. Gibson Jr., (eds), Perspectives of Property (University Park: Institute for Research on Land and Water Resources, Pennsylvania State University, 1972); ‘The Coase Theorem and the Study of Law and Economics’; ‘An Economic Perspective on the Compensation Problem’; and ‘Public Utilities and the Theory of Power’.Google Scholar
  16. 15.
    Victor P. Goldberg, ‘Regulation and Administrated Contracts’, mimeographed, p. 12. See also Bruce Yandle, ‘Property in Price’, Journal of Economic Issues, vol. 9 (September 1975) pp. 501–14.Google Scholar
  17. 16.
    Frederic L. Pryor, Property and Industrial Organization in Communist and Capitalist Nations (Bloomington: Indiana University Press, 1973) pp. 2, 7 and passim. Google Scholar
  18. 17.
    A. A. Schmid, ‘Nonmarket Values and Efficiency of Public Investments in Water Resources’, American Economic Review, vol. 57 (May 1967) pp. 162–4.Google Scholar
  19. 19.
    Victor P. Goldberg ‘Institutional Change and the Quasi-Invisible Hand’,Journal of Law and Economics, vol. 17 (October 1974) pp. 461–92.CrossRefGoogle Scholar
  20. 21.
    John H. Gray and Jack Levin, The Valuation and Regulation of Public Utilities (New York: Harper, 1933) chaps 1, 8, 9, 10.Google Scholar
  21. 22.
    Andrew M. Rouse, ‘Organization Reform of the Regulatory Agencies and Alternatives to It — A Critique of the Ash Council Report’, in Warren J. Samuels and H. M. Trebing (eds), A Critique of Administrative Regulation of Public Utilities, (East Lansing: Division of Research, Michigan State University, 1972) pp. 2973x2013;33 and passim. Google Scholar
  22. 31.
    Harry Barker, Public Utility Rates (New York: McGraw-Hill, 1917) p. vii. ‘The best forms of regulative legislation evidently were framed by men who saw possibilities of curing grave corporate abuses, though the passage of regulating acts probably was helped by those who saw new prospects of political capital’ (p. 1).Google Scholar
  23. 32.
    Herbert A. Simon, ‘The Changing Theory and Changing Practice of Public Administration’, in Ithiel de Sola Pool (ed.), Contemporary Political Science: Toward Empirical Theory (New York: McGraw-Hill, 1967) p. 116, n. 1.Google Scholar
  24. 40.
    A. A. Schmid, ‘Rules for Benefit-Cost Analysis of Public Resource Development Projects as a Control over Implicit Grants: The Role of Public and Private Property Rights in the Grants Economy’, paper presented to the annual meeting of the International Studies Association, Washington, DC, 21 February 1975, pp. 3–5, 14–16.Google Scholar
  25. 43.
    James C. Bonbright, Principles of Public Utility Rates (New York: Columbia University Press, 1961) p. 291.Google Scholar
  26. 45.
    Trebing, ‘Realism and Relevance’, p. 215; compare James M. Buchanan, ‘A Public Choice Approach to Public Utility Pricing’, in James M. Buchanan and Robert D. Tollison (eds), Theory of Public Choice, (Ann Arbor: University of Michigan Press, 1972) pp. 153–66.Google Scholar
  27. 46.
    William H. Melody, ‘The Marginal Utility of Marginal Analysis in Public Policy Formulation’, Journal of Economic Issues, vol. 8 (June 1974) p. 294. Economies of scale as a justification for preemptive pricing beg the question of whose interests are to be promoted through structure, including the generation of alternative costs (beyond those calculated by the company) to check the economies of scale assumption. Adoption of company policy is self-validating and gives effect to the company premise of the company’s interests being superior.Google Scholar
  28. 47.
    See Melody, ‘Marginal Utility’, pp. 291, 293, 298–9 and passim; Alfred E. Kahn, ‘Economic Theory as a Guideline for Government Intervention and Control: Comment’, Journal of Economic Issues, vol. 8 (June 1974) p. 304;Google Scholar
  29. 47a.
    and W. J. Samuels, ‘Public Utility Rate Making and Competitive Structure: Carterfone in Jeopardy’Wayne Law Review, vol. 20 (March 1974) pp. 819— Google Scholar
  30. 49.
    Joel B. Dirlam, ‘Comment’, in H. M. Trebing (ed.), Essays in Public Utility Pricing and Regulation (East Lansing: Institute of Public Utilities, 1972) p. 400. Traditional concern with the confiscation possibilities of rate control should be compared with the consequences of rate structure changes for consumers: Both company and consumer rights are a function of rates, and the traditional concern protected companies (and investors) and consumers asymmetrically.Google Scholar
  31. 50.
    A. A. Schmid, ‘Analytical Institutional Economics: Challenging Problems in the Economics of Resources for a New Environment’, American Journal of Agricultural Economics, vol. 54 (December 1972) pp. 893–901.CrossRefGoogle Scholar

Copyright information

© Warren J. Samuels 1992

Authors and Affiliations

  • Warren J. Samuels
    • 1
  1. 1.Michigan State UniversityUSA

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