The Theory of Water and Utility Pricing - Global Drinking Water Management and Conservation - page 75

order to cover the capital costs. The pricing rule that emerges from Ramsey takes
into account the need to raise the necessary capital, and so the optimal

prices, called Ramsey Prices, for public utilities. The pricing rule can be called the
“

“ constrain ”

from marginal cost pricing, where the higher prices are charged
on those whose elasticity is the lowest, whether it is the demand elasticity or the
supply elasticity. Ramsey did not address the question as to whether the production
was to be produced in the public sector or the private sector. That question became
important in an era with a drive toward deregulation and a major effort to make
government

optimal departure ”

An understanding of the historical context might make it
easier to understand this new direction whereby the Central State reneges on its
responsibilities and requires lower local jurisdictions to assume the

“ small. ”

financial bur-

dens which were previously shouldered by the Central Government.
The low-tax climate referred to above was largely responsible for the diminution
of the Central State, an ideological position championed by President Reagan in the
US and Margaret Thatcher in the UK. For example, the Conservative government
of Margaret Thatcher in the UK undertook large-scale privatization; and the sale of
state assets saw the reduction of the share of public production of goods and
services in GDP from 6.6 percent in 1982 to 1.9 percent in 1991, compared to a
share of 0.6 percent in the United States in 1987. The bene

ts of privatization were

thought to be increased ef ts for consumers. A survey of the

evidence carried out by Boardman and Vining ( 1989 ) supported this view. In
economic theory, the relative role of the public and private sectors remained a key
issue in public

ciency and bene

Some fundamental theoretical
questions on this have been well addressed in a balanced manner by Stiglitz ( 1989 ).
Nevertheless in the economics of the Chicago school, there appears to be a strong
bias in favor of privatization. Although John Maynard Keynes ( 1981 ) was the main
proponent of the role of the state in economic affairs, he was not dogmatic on the
boundary between the private and public sectors. To quote Keynes ( 1981 ):

nance and “ public economics. ”

The line of demarcation between the two is constantly changing in accordance with the
practical needs of the day. As to where precisely this line should be drawn no great question
of principle is involved.

The balanced approach of Stiglitz indicated that the relative attractiveness of
public ownership and production depended on the importance of market failures
versus public failures. Failures in either sector can arise on account of a lack of
competition, imperfect information, and incomplete markets. Taking this literature
into account, several papers formalized the choice between private and public pro-
duction. Shapiro and Willig ( 1990 ), Bos and Peters ( 1988 , 1991 ), and Hart et al.
( 1997 ) focus on the market failures of imperfect information and incomplete con-
tracts; Laffont and Tirole ( 1991 ) and Schmidt ( 1996 ), in addition, consider the public
failure of governments that fail to live up to their pre-announced commitments.
While these papers are insightful, they do not offer an explanation of why the
share of public production varies so much even among developed countries. The
theory of optimal taxation offered a fruitful approach to the question (see, for
example, Atkinson and Stern ( 1974 ), Dasgupta and Stiglitz ( 1972 ) Diamond and