1 - Introduction

Abstract

This chapter presents an introduction to pricing and price regulation. It discusses the normative and positive theory. Government has particular political or bureaucratic objectives. Such objectives are the basis of a positive theory of pricing and price regulation. Positive means that the respective objective functions are meant as an actual description of economic reality. Price setting rules of the positive type cannot be justified by means of higher-order value judgments. However, they are a good basis for an analytical investigation of prices that have actually been charged by public or regulated firms. The traditional theory assumes that there is only one objective that matters for the decisions of the public enterprise. The chapter presents two alternative explanations that make this strong assumption plausible: (1) the various actors engaged in public-sector pricing and investment are assumed to be interested in the same objective; and (2) the government officials are fully informed about everything in the firm and hence succeed in forcing all other actors into following the governmental instructions.