Introduction

Thus far we have emphasized an efficiency goal while accepting the current distribution of income as satisfactory. When entry is freely allowed into a market, the cross-subsidization that is necessary if income is to be redistributed through prices cannot be sustained. Yet it is sometimes reasonable to affect the distribution of income through public pricing decisions, particularly if income redistribution goals are widely agreed upon and other means of affecting income distribution are not available. Even if income distribution is not being sought as a goal, it may be useful to understand how it is affected by prices. Considering how individual welfare weights can affect prices shows more clearly why the assumptions underlying consumer surplus do not call for income redistribution.

We first examine the idea of anonymous equity. It is consistent with free entry, and if its conditions are met, cross-subsidization among consumers is impossible. We next consider the pricing implications of welfare weights that differ from those in consumer surplus based on the current distribution of income. We show how alternative weights affect optimal prices and can even rationalize cross-subsidization, which means they require entry barriers to be effective. The effect of welfare weights is extended to the case in which consumption of certain “beneficial” goods creates positive external effects and so is to be encouraged. Discussion is initially confined to uniform prices, prices that are proportional to quantity consumed for all consumers.