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The Optimal Pricing of Publicly Supplied Private Goods: A Case Study of NIST Standard Reference Materials

Published

Author(s)

S Fuller, J J. Cordes

Abstract

This study provides a framework for determining optimal prices and production plans for a welfare-maximizing public enterprise that producesmultiple goods, faces a budget constraint, and is obligated to meet all demand. Public enterprises often operate under conditions of decreasingmarginal cost where first-best, profit-maximizing rules lead to deficits. In order to cover costs, prices therefore need to exceed marginal cost. Apublic-sector pricing model in the Boiteux tradition computes price and output combinations that minimize the loss from charging prices that do not equal marginal cost.The report describes the Boiteux model and its extensions. The Ramsey version of the model is applied to the pricing problem of the Standard Reference Materials Program (SRMP) at the National Institute of Standards and Technologly(NIST). The NIST SRMP supplies samples of materials whose physical or chemical properties are precisely characterized; they are used as intermediate goods by firms and laboratories who use them to calibrate manufacturing equipment or scientific apparatus for quality control. The SRMP is faced with the problem of how to calculate prices that will cover the cost of the program and will result in quantities that just meet demand at those prices. The model was applied to a group of 11 SRMs. After estimating their demand and cost functions and combining them with the theoretical principles of the model, optimal prices and production plans were calculated for the group of 11 SRMs for the years 1978 to 1992. The results fulfilled the optimality requirements of the Ramsey-Boiteux model: Deviations of price from marginal cost were inversely proportionate to the goods= price elasticities of demand, and the corresponding optimal quantities of SRMs maintained the same proportions as the quantities that would have been demanded at prices equal to marginal cost. In every year of the study period there would have been a welfare gain if Ramsey prices had been charged rather than average-cost prices, and unit sales and revenues would have been higher than they were under the actual pricing policy of the SRM Program in the years from 1978 to 1992.The analysis shows that in the case of NIST SRMs the Ramsey-Boiteux model can provideconcrete and relatively simple pricing rules that yield welfare-optimizing prices and quantities.the Standard Reference Materials Program (SRMP) at the National Institute of Standards and Technology (NIST). The NIST SRMP supplies samplesof materials whose physical or chemical properties are precisely characterized; they are used as intermediate goods by firms and laboratories who usethem to calibrate manufacturing equipment or scientific apparatus for quality control. The SRMP is faced with the problem of how to calculate pricesthat will cover the cost of the program and will result in quantities that just meet demand at those
Citation
NIST Interagency/Internal Report (NISTIR) - 6302
Report Number
6302

Keywords

economic analysis, inverse-elasticity rule, marginal-cost pricing, multi-product public enterprises, optimal pricing, Ramsey prices, standard reference materials, user fees, welfare maximization

Citation

Fuller, S. and Cordes, J. (1999), The Optimal Pricing of Publicly Supplied Private Goods: A Case Study of NIST Standard Reference Materials, NIST Interagency/Internal Report (NISTIR), National Institute of Standards and Technology, Gaithersburg, MD, [online], https://tsapps.nist.gov/publication/get_pdf.cfm?pub_id=860021 (Accessed April 14, 2024)
Created June 1, 1999, Updated February 19, 2017