Confusing Fixed and Variable Costs Under Ramsey Regulation

Posted: 10 Jul 1998

See all articles by Santiago Urbiztondo

Santiago Urbiztondo

National University of La Plata and FIEL, Argentin

Date Written: 1997

Abstract

Ramsey regulation, in the context of tariff rebalancing, is analyzed when the regulator is not fully informed about the cost structure of the firm. It is shown that even if the estimated relation between variable costs of the two goods produced is correct, errors regarding the composition of a given total cost between fixed and variable elements result in: (1) the price of the good with a higher (lower) elasticity of demand decreasing (increasing) as the estimated fixed cost is higher; and (2) the profits obtained by the regulated firm being lower than intended with whatever mistake is made, such as under or over estimating fixed costs.

JEL Classification: L51

Suggested Citation

Urbiztondo, Santiago, Confusing Fixed and Variable Costs Under Ramsey Regulation (1997). Available at SSRN: https://ssrn.com/abstract=69069

Santiago Urbiztondo (Contact Author)

National University of La Plata and FIEL, Argentin ( email )

Av. Cordoba 637
Buenos Aires
Argentina
(54-1) 314-1990 (Phone)
(54-1) 314-8648 (Fax)

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