Price Structures, Cross-Subsidies, and Competition in Infrastructure
Author: Timothy Irwin Date: 2/1/1997 (PDF, 200KB)
One common--and erroneous--argument against introducing competition in infrastructure is that entry barriers are necessary to maintain subsidies. Timothy Irwin explains how subsidies can be funded in a competition-neutral way by, say, imposing levies on all the operators or funding the subsidy out of general tax revenue. A third option is to end price subsidies altogether, relying instead on social safety nets to assist those who lose when competition leads to rate rebalancing. That may be the most equitable approach--as price subsidies do a notoriously bad job of targeting assistance to the very poor in developing countries.