Incentive Pricing and Utility Regulation: Reply
elasticity of demand is less than one is entirely correct. It may be only a quibble, but it seems to me to be more appropriate to consider the rate of exchange between total profit, 7x, and the total waste, W, rather than the rate of exchange between Xr and the rate of inefficiency, X, as does Jaffee. It is a little misleading for Jaffee to maintain that the relationship between wastage and profit is a simple one to derive, and then follow up with a comparison of X7 and X: a different function entirely. My selection of W instead of X was not made inadvertently, but reflected my tendency to think along the lines of Williamson's emoluments, for which W (total emoluments) is surely the more relevant variable.' In a way, I suppose this remains a matter of taste since one can conceive of a managerial utility function with the rate of inefficiency used as an index of management comfort. Even so, I would expect the discomfort associated with reductions in X to vary positively with volume, and this leads back to W as the proper measure.
- DOI
- 10.2307/1880502
- Volume
- 86 (1)
- Pages
- 145
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