Chapter Ƕ: Ļe Debate about the Efficiency of a Socialist Economy ȆȈto correct forecasting would suffer if there were no subsequent mar-
ket test of whether such estimates of individual demand were correct
or not.
Coase’s second objection to Hotelling-Lerner pricing is that it would
redistribute income in favor of patrons of decreasing-cost industries. It is
not easy to imagine how such a redistribution might be considered ethi-
cally desirable. For instance, Harry Norris (ȀȈȃȆ, pp.Ȅȃ–ȅȁ) imagines two
countries which are identical except that one is lighted by a constant-cost
gas industry and the other is lighted by a decreasing-cost electric industry.
In each country ten percent of the taxpayers are backwoodsmen living
beyond the range of utility service. In the gas-lit country, each house-
hold pays for its lighting in full. But according to the Hotelling-Lerner
solution, the backwoods taxpayers in the electric country should subsi-
dize the lighting of the city dwellers. Yet this arrangement could hardly
be defended on ethical grounds.
A third objection to Hotelling and Lerner is that the taxation neces-
sary to raise subsidy money would have the familiar disincentive effects
where imposed.
A fourth set of objections to marginal-cost pricing is mentioned,
strangely enough, by a champion of the Hotelling-Lerner solution and
opponent of Coase’s proposals. William Vickrey (ȀȈȃȇ, pp.ȁȀȇ–ȁȂȇ) points
out that in some instances the application of Hotelling-Lerner pricing
might involve serious political and sociological consequences. Vickrey
may have in mind the dangers of any new excuse for raids on the United
States Treasury.
R.H. Coase (ȀȈȃȅ, pp.ȀȅȈ–Ȁȇȁ, esp. pp.ȀȆȂff.) seeks to reconcile the
implications of his own and the Hotelling-Lerner reasoning by the inge-
nious device of multi-part pricing. Patrons of decreasing-cost industries
are charged a lump sum or series of lump sums which are supposed to
cover intra-marginal costs. Each consumer is then allowed to obtain addi-
tional units of product at the marginal cost. Ļe advantage of multi-part
pricing is that consumers can be asked to pay a total amount which is equal
to the total cost. Ļerefore, it is possible to discover whether consumers
value the total supply at least the total cost of supplying them. (Under a
pricing system, whether consumers are willing to pay an amount equal
to total cost can be discovered only by actually asking them to pay this
amount.) At the same time, additional units are supplied at additional
cost, and so the right output can be obtained; that is, the Lerner alloca-
tion of factors can be achieved.