EKONOMI MANAJEMEN

INFRASTRUKTUR:
Tarif Infrastruktur
Oleh:
Nuzul Achjar

Magister Perencanaan dan Kebijakan Publik

(MPKP) - Universitas Indonesia
Jakarta, 16 Maret 2024
Price and output under monopoly
The monopolist maximizes its profit. Thus, it must
operate at the point where:
MR=MC

Because the monopolist can control its price by

changing quantity of output. Thus, the demand
curve is no longer a flat straight line.
In turn, the monopolist’s MR is no longer equal to
its price.
Monopolist’s MR curve:

Demand Curve TR MR MC
Qd P
1 $10 10 $1
2 9 18 2
3 8 24 3
4 7 28 4
5 6 30 5
6 5 30 6
7 4 28 7
Monopoly versus Competition
 Assuming that a
monopoly and a
competitive industry P
would have the same MC MC
curve.
 The competitive industry
produces at QC and price PM
PC. PC
 Since MC>MR at Q , the
C
monopolist will reduce the
quantity until QM such that D
MR=MC. MR
QM QC Q
Monopoly pricing: an example
The monopolist maximizes its profit. Thus, it must operate at
the point where:
MR=MC
Suppose that the demand curve is Q = 12-P.
Total revenue: TR = P*Q = (12-Q)*Q
Marginal revenue: MR = 12-2Q
Suppose that marginal cost MC=Q. What is the
monopoly price and output?
MR=MC
12-2Q=Q
Q=4, P=8
Elasticity of Demand
The (price) elasticity of demand is the most
important information for the monopolist.

Q / Q Q P
   0
P / P P Q

The inverse of the

slope of the demand curve
We can derive the elasticity of demand at certain
price and quantity by using the information of the
demand curve.
The elasticity of demand helps us quantify the impact
of a change in quantity on market price:

Note: under perfect competition, the demand curve is

flat (i.e. perfectly elastic; =- ). Thus, P=0.

Q  P
P 
Q 
Elasticity of demand and monopolist’s
marginal revenue
Monopolist’s marginal revenue:
P
MR  P  P  Q  P  Q
Q
 1
 P1  
 
Since the monopolist only produces when MR>0
(I.e. ||>1. We call this segment of the demand
curve as elastic).
In other word, a monopolist always operates at the
elastic portion of the demand curve. (||>1)
The monopolist has no supply curve
A monopolist is never asked such a question like:
“How much will you produce at a going market price?”
There is no supply curve in the industry. It’s the
monopolist who sets the price.
 Competitive pricing v.s. monopoly
pricing: overview

Monopoly pricing:
Competitive pricing: P>MR=MC
P=MR=MC

 1
MR  P1  
 
MR
P
 1
1  
 
The margin between P and MR depends
on the elasticity of demand.
Efficient loss due to monopoly
P
MC

PM A B

Competition Monopoly PC
C D E
GH
CS ABCDE AB F
PS FGH CDFG
D
SG ABCDEFGH ABCDFG MR
DWL EH Q
QM Qc
Regulations
Possible remedies to the inefficiency caused by
monopoly are to induce the monopolist increase the
quantity and decrease the price.
1. Subsidy
2. Price ceiling
3. Rate-of-return regulation
 P
MC
MC’
1. Subsidize
PM A B

the monopolist PC
C D E
GH
$S

The subsidy of $S per unit of output, which lowers F K

the MC curve to MC’, is chosen to be of just the
J
right size so that monopolist will produce at
I D
competitive quantity Qc. MR
Competition Unsubsidized Subsidized QM Qc
Monopoly Monopoly
CS ABCDE AB ABCDE
PS FGH CDFG FGHIKJ
Cost to - - IJK
taxpayers
SG ABCDEFGH ABCDFG ABCDEFG
H
DWL - EF -
2. Price ceiling
If the government can set the price ceiling at the
competitive price Pc, then there is no dead weight
loss.
But, the government may set a wrong price
because of lacking accurate information about the
market conditions (e.g. MC and MR).
As an alternative, the government often requires
the monopolist to produce at P=AC so that the
monopolist earns zero profit.
But may not remove the entire dead weight loss caused
by monopoly because AC usually does not equal MC.
3. Rate-of-Return Regulation
The goal of this regulation is to make monopolists
behave like competitors, who earn zero profit in
the long run (Pz=AC). As such, we hope to
eliminate the dead weight loss and reach an
efficiency outcome.
However, for some monopolists, the zero profit
condition may not eliminate the dead weight loss.
Again, this is because AC may not equal MC.
See details at Exhibit 10.5
Natural Monopoly
Example:
 Consider a firm that produces a word processing program.
The fixed costs of developing the software are very high,
but the marginal cost is almost zero.
 In a competitive market, the software will be sold at
marginal cost (almost equal to zero). Then, all firms earn
negative profits. In the long run, nobody is willing to enter
the business.
 Thus, a competitive market for word processors cannot
survive.
 To survive in the market, companies need to merge and
form a monopoly-like company. Such an industry is called
a natural monopoly.
The causes to natural monopoly (1)
The natural monopolist has huge fixed cost, small
marginal cost. Thus,
 It cannot survive in a competitive market;
 It must set the price high enough to cover its fixed
cost.
 The causes to natural monopoly (2)
P

Each firm in the industry

has its average cost
curve decreasing at the MC
point where it crosses
market demand. Pz AC
Pc
Suppose that the government can D
forces the natural monopolist
to price competitively (so
MR
Q
price equals Pc=MC). None QZ Qc
will remain in the industry
because Pc<AC, causing
negative profit.
 Note
P
If the firm’s average cost
curve increases at the
point where it crosses MC
market demand, it’s
possible for government Pc AC
to force the monopoly to Pz
price competitively D
without making the firm
out of business. MR
Qc QZ Q
Welfare economics of natural monopoly
No policy can effectively force natural monopoly
industry to price competitively because of the
nature of the market and cost structure.
Is there a hope for efficiency?
Competing for monopoly power
The positive profit in the industry would attract
competitors, who have strong incentives to innovate and
develop new product and upgrade the quality
The social value of the innovation
Sources of monopoly power
Natural monopoly
world processors, computer software
Resource monopoly
Electricity, water, oil
Patents
Legal barrier to entry
Restaurants or snack bars by interstate
throughway.
Mechanisms to Regulate Prices
 Rent extraction—setting rates that strike a socially acceptable
compromise between the interests of investors and
consumers.
 Supply-side efficiency—providing signals and incentives for
suppliers and investors to increase efficiency.
 Demand-side efficiency—providing signals and incentives
for efficient consumption of regulated utility services.
 Revenue adequacy—allowing regulated firms to earn
sufficient revenue to attract needed capital.
 Fairness—ensuring that prices are just and reasonable, and
contribute to universal service goals without creating
significant distortions (Joskow 1998b).
 Mechanisms to Regulate Prices
 Two alternative mechanisms for regulating prices are cost-
plus and price caps, and hybrid model.
 Until recently cost-plus regulation dominated utility
industries in the United States and several other countries.
Policymakers have been attracted to this mode of
controlling utility behavior because it seems fair to both the
regulated firm and its customers. It permits the firm to earn
sufficient revenues, including a fair return on its
investment, by passing its costs on to consumers through
the prices charged.
 It is also designed to protect consumers from monopolistic
pricing distortions.
Marginal Cost
Marginal cost is the cost of producing an additional
increment of output or providing an additional
increment of service
In the short run, capital equipment is fixed so that the
SRMC is the cost of producing an additional unit of
output or providing an additional unit of service with
existing capacity
In the long run all capital equipment is variable.
 Marginal Cost in Electricity (1)
The electricity prices should be set not only to meet
the economic efficiency but also to meet various
social, financial and political objectives. These special
features of electricity make its pricing complicated.
Moreover, production costs of electricity varies with
the change in electricity demand and time which
makes the pricing yet more difficult.
 Marginal Cost in Electricity (2)
According to the economic theory of efficient pricing,
the prices of commodities should be set equal to their
marginal cost of production.
Marginal costs are those costs which would incur if we
provide an additional unit of power at a given time in a
particular season, at a given voltage level
It gives a signal to consumers about how much they
will have to pay if they want to use one more unit of
electricity at a particular moment of time.
 Marginal Cost in Electricity (2)
According to the economic theory of efficient pricing,
the prices of commodities should be set equal to their
marginal cost of production.
Marginal costs are those costs which would incur if we
provide an additional unit of power at a given time in a
particular season, at a given voltage level
It gives a signal to consumers about how much they
will have to pay if they want to use one more unit of
electricity at a particular moment of time.
 PRICING UTILITY: TRANSPORTASI

• Transportasi adalah bagian dari utility services yang dikonsumsi oleh individu atau rumah
tangga
• Pada prinsipnya penentuan pricing dimaksudkan agar konsumen memperoleh social welfare
dan operator memperoleh benefit dalam bentuk keuntungan dan pengembalian investasi
• Perubahan harga atau tarif akan berdampak pada pengeluaran rumah tangga yang berarti
akan berpengaruh pula terhadap distribusi pendapatan dan daya saing industri pengguna
jalan tol
• Terdapat tiga isu yang terkait dengan pricing jalan tol:
• Jalan tol layang Jakarta Cikampek yang berada di atas jalan tol lama
• Jalan tol mempunyai jalur khusus untuk barang over
• Jalan tol Jakarta Surabaya sebagai satu kesatuan
PRINSIP UMUM TRAFFIC CONGESTION

• c(V) adalah kurva biaya pribadi user

• d(V) adalah kurva permintaan atau
disebut juga sebagai kurva marginal
benefit
• E adalah titik keseimbangan antara
kurva biaya pribadi (supply) dengan
permintaan.
• pE tarif keseimbangan dengan
volume sebesar VE
• MC adalah kurva biaya marginal
social untuk menunjukkan bahwa
volume VE belum menggambarkan
titik optimum – volume kendaraan
harus diturunkan dari VE ke V0
dengan menetapkan user charge atau
tarif toll sebesar OB
ACCESS AND USER PRICE
• n menggambarkan biaya yang
dikeluarkan oleh user namun belum
mempertimbangkan eksternalitas
yang belum dikenai tax  access
charge
• k adalah biaya dikeluarkan oleh user
dengan tax sebesar ki dengan volume
kendaraan Q0  user charge 
willingness to pay (WTP)
• Jika permintaan rendah ketika pada
jam tidak sibuk maka user charge
dapat diturunkan menjadi d
• Operator dapat juga mengurangi
volume kendaraan agar waktu
tempuh kendaraan lebih cepat dengan
charge sebesar jg.
 JALAN LAYANG JAKARTA-
CIKAMPEK
• Congested price menggunakan prinsip marginal cost sebagai first best pricing
• Persoalannya prinsip ini seringkali tidak mengakomodasikan pengembalian
investasi khususnya ketika average cost masih di atas marginal cost
• Berangkat dari prinsip ini, jalan layang Jakarta-Cikampek memerlukan
pengembalian investasi maka sebaiknya jalur ini dianggap sebagai expressway
dengan tarif lebih tinggi dari jalur di bawahnya dengan syarat, kecepatan
kendaraan menjadi lebih tinggi.
• Jika expressway dimaksudkan agar user dapat mencapat tujuan lebih cepat, time
value of money menjadi pertimbangan dengan konsekuensi volume kendaraan
diarahkan lebih sedikit dibandingkan jalan di bawahnya
• Di sini diperlukan informasi mengenai willingness to pay (WTP) user pada jalur
expressway.
 PRICING LAYANG JAKARTA-
CIKAMPEK
Tarif
expressway Toll layang • Diasumsikan di sini, tarif expressway
Tarif standar menjadi lebih mahal dibandingkan dengan
jalan toll di bawahnya karena WTP lebih
tinggi
• Volume kendaraan diperkecil sedemikian
rupa sehingga waktu tempuh menjadi lebih
singkat  time value of money

Volume Expressway Jkt-

Cikampek
Long Run Marginal Cost
The LRMC is defined as the difference in the present
value of the future stream of costs associated with
producing an additional unit of output. A change in
the level of current output alters the future construction
programme
The difference in the present value of costs of the
future system configurations with and without the
increment in output is the LRMC.
Short Run Marginal Cost
In theory, economic efficiency is maximized when price
is set at SRMC at each moment in time
It is the SRMC that reflects the actual incremental cost to
society imposed by the use of one more unit of output.
For greatest overall social efficiency, the consumption
decision should be based on this cost
In reality, however, pricing at SRMC may be impractical
and expensive. For one thing, it varies frequently and may
be very difficult to measure. Furthermore, it may lead to
under-recovery of costs over time
SRMC vs LRMC untuk Listrik (1)
The SRMC of electricity production is measureable
On the other hand, it is difficult to compute the LRMC
of electricity production. It involves estimates of future
capital, operation and maintenance (O&M) and fuel
costs as well as projections of demand, interest rates,
and inflation
Up to the early 1970s these underlying cost factors
were fairly stable. Therefore, the calculation of LRMC
was fairly reliable.
SRMC vs LRMC untuk Listrik (2)
 However, with the oil shock in 1974, unprecedented inflation and
unpredictable increases in capital costs, measurement of future costs has
become very difficult
 As evidence of this, much of the US electric utility industry finds itself
swamped by excess capacity and riddled with cost overruns. These are the
result of incorrect past forecasts of demand and costs
 The imprecision of the forecasts is intrinsically tied to the volatility of the
underlying factors. The result is that the estimates of LRMC are not very
reliable
 Thus, setting price equal to LRMC will result in a price signal which may
be greatly distorting. That is, it will lead to both short-term and long-term
consumption decisions which are based on miscalculated costs
 The proponents of LRMC pricing cite four main reasons for wanting to
base price on LRMC:
 price stability
 price signalling
 equality of SRMC and LRMC in equilibrium
 Revenue requirements.
Marginal Cost in Electricity (1)
The electricity prices should be set not only to meet
the economic efficiency but also to meet various
social, financial and political objectives. These special
features of electricity make its pricing complicated.
Moreover, production costs of electricity varies with
the change in electricity demand and time which
makes the pricing yet more difficult.
Marginal Cost in Electricity (2)
According to the economic theory of efficient pricing,
the prices of commodities should be set equal to their
marginal cost of production.
Marginal costs are those costs which would incur if we
provide an additional unit of power at a given time in a
particular season, at a given voltage level
It gives a signal to consumers about how much they
will have to pay if they want to use one more unit of
electricity at a particular moment of time.
 EKONOMI MANAJEMEN
INFRASTRUKTUR:
Ramsey Pricing
Oleh:
Nuzul Achjar

Magister Perencanaan dan Kebijakan Publik

(MPKP) - Universitas Indonesia
Jakarta, 7 Nov 2018
 Pricing Scheme
•Marginal cost pricing
•Peak pricing
•Ramsey pricing
•Two part tariff
 What is Ramsey pricing?
•A calculation scheme to achieve cost coverage for
natural monopolists
•Usually natural monopolists maximise their profits
by charging the price according to marginal costs.
•But what happens if average costs are higher than
marginal costs?
•Ramsey prices are computed by charging inversly
to elastcity of demand. Those with a high willingness
to pay have to pay higher prices as those not willing
to pay more.
• Thus it allows an adequate allocation of
capacity and lowers the deadweight loss (which
occurs if monopolists charge according to marginal
costs).
• i- denotes an aircraft type
• ηi- price elasticity of demand for passenger trips (demand
for landings)
• Tci– Total cost of a flight: Depending on aircraftsize &
flight distance
• δ(TC)/δQi- marginal cost; they result from differentiation of
total operating costs, which are functions of distance
• K- λ / 1+λ, where λ – extent to which the revenue
constraint is binding.
 Assumptions
Natural monopoly
Cost minimization requires one firm in the market
Strong natural monopoly
MC pricing crease deficit
MC with subsidies is not an option
Barriers to entry
Product demands are unrelated (we relax this
assumption later in more complex models)
 Regulation

Objective is to maximize social welfare subject to the

firm breaking even
Per unit charge (constant price)
Prices across markets can vary
First best pricing is not an option
Second best (Ramsey Prices) based on maximizing
welfare subject to an acceptable level of profit
 Ramsey Idea
We can’t maximize Social Welfare
Must adopt a price different from MC
How much should price deviate from MC?
Raise prices until the marginal welfare losses across
product markets are balanced.
Prices are raised in inverse proportion to the absolute
value of the demand elasticities in each market and this
minimized the welfare losses associated with higher
prices.
Elastic, small raise
Inelastic, large raise
Comparing Elasticities

Deadweight loss of market two

p1(q1) p2(q2)

a
p΄ f e

d
p1=p2
g b c

o q
q1΄ q2΄ q1=q2
 The Math Behind Ramsey
 Consider a multiproduct firm producing outputs q= (q1, … ,qn ), with cost function given by
C(q).
Demands for the n goods are represented by the inverse demand function, pi(qi), i=1, …, n.

Consumer surplus in the ith market be given by

(3.1) qi
CS i   pi ( xi ) dxi  pi ( qi ) qi
for i=1, …, n, and profit for the firm is
o
(3.2)

 If we maximize a measure
n of welfare (W), it is the sum of all CSi plus profit,
  p
i 1
i ( qi ) qi  C ( q )

W   CS i 
 Max Welfare
W   CS
First Order Condition gives
i 

W pi pi C
 pi (q i )  qi  pi (q i )  qi  pi (q i )  0
qi Implies qi qi qi

C
pi (q i ) 
qi
Max Welfare s.t. Break even Profit
L  W   (   )
First Order Condition gives

L C pi C
 pi (q i )    ( pi (qi )  qi  )0
qi
Implies qi qi qi

 C  pi
 pi (q i )  1      qi  
 qi  q i
What is Lambda?
Let profit be constrained to    , then,
0 using the
envelope theorem, we have
L /   W /    , or roughly
speaking, if the firm’s profit is decreased by $1, which
will mean a $1 deficit, then welfare will increase by
$λ.
Ramsey Prices
 Rearrange (3.4), we obtain

 pi (qi )(3.5)
 MCi ( q )1      qi pi ( qi )
and then dividing both sides bypi (qi ) and 1    yields

pi (qi )  MCi (q)   1


pi ((3.6)
qi ) 1   ei

where ei  pi (qi ) /qi pi(qi )  0 , the elasticity of demand in market i .

The price in (3.6) is called the Ramsey price in market i. Because (3.6)
is true for all i, the formula states that the percentage deviation of price
from marginal cost in the ith market should be inversely proportional to the
absolute value of demand elasticity in the ith market.
Results and Conclusions
 From (3.6), and for all markets, the percentage deviation of price from
marginal cost, times the price elasticity, sometimes called the Ramsey
number, should be equal to –λ/(1+λ).
 If λ is very small, the Ramsey number approaches zero, implying that
prices will be very close to marginal cost.
 The deficit under efficient pricing is small:
 Reducing profit by $1 and recalculating prices will not increase welfare

 If λ is large, the Ramsey number is close to 1;

 such a situation occurs when an unconstrained monopolist barely breaks
even
 The price-cost deviations are so substantial that large welfare
improvements are possible if a subsidy can be transferred to the firm to
compensate for negative profit.
More Results
 Relatively inelastic demands mean smaller values of |e | and
i
higher percentage price deviations from marginal cost.
 Relatively elastic markets, the percentage price deviation will
be smaller,
 Thus, for the ith and jth markets
 pi (qi )  MCi (q)/ pi (qi ) 
ej
p (q )  MC (q(3.6a)
j j )/ p (q )
j j j ei

 Given initial Ramsey prices, if |e | were to increase, ceteris

i
paribus, pi and Mci would have to be brought closer together
and /or pj and MCj be moved further apart for the Ramsey
conditions to hold.
Another Interpretation/Result

 By adding   pi  qi pi  MCi  to both sides for markets i and j

to obtain pi (qi )  MCi (q ) p j (q j )  MC j (q)

MCi (q)  MRi (q) MC j (q)  MR j (q)
(3.7)

Where MRi(q) is the marginal revenue in the ith market.

By (3.7), if we were to increase output by Δqi and Δqj from

the profit-maximizing solution,
 the numerators would be the marginal gain from additional consumption,
 the denominators the marginal loss in profit.
 this marginal-benefit/marginal-loss ratio must be equal across markets at
the point where profit is down to zero.
Comparing Output Market Elasticities
and Ramsey Pricing

Deadweight loss of market two

p1(q1) p2(q2)

a
p΄ f e

d
p1=p2
g b c

o q
q1΄ q2΄ q1=q2
 Comparing Output Market Elasticities
and Ramsey Pricing
 Initially, prices and quantities demanded for both goods are equal at
point d.
 If prices must be increased to eliminate a deficit, which market
should bear more of the burden in terms of a higher price?

 If prices was raised to p΄, there would be a deadweight loss of adb

in the market one and a loss of ecd in market two. The former is
larger than the latter, indicating that price should increase more in
market two than in market one. This is also called “what the traffic
can bear” or “value-of-service pricing”.
Charges‘ structure in the Airport
• As depicted, pricing to marginal cost will result in a loss in this case as
average costs are higher than marginal costs.
• If capacity is not exceeded, airport‘s cost for additional demand is close to
zero.
• Thus marginal cost pricing will lead to a loss. Therefore an alternative
pricing scheme (second best pricing) is necessary, where price +
subsidies (if there are any) are high enough to cover the average costs.
Example: Parameters
Example: Calculation
To make Ramsey prices comparable we calculated the
landing fee for the same aircraft, charged in reality.

•In 2003 the landing fee for an Airbus A 320 – 200

was: 221,00€ + 73,5 t * 4,15€ = 528,10€

•Result: at a flight distance of 1.000 Km weight based

charging leads to 21,57% more revenue as Ramsey
pricing.
•But if flight distance increases to 3.000 Km, the airport
will benefit massively from Ramsey praicing due to the
lower elasticity of demand and gain about 376% more
revenue than by using weight-based charging.
 Consequences

• If a Ramsey pricing system is adopted long-distance

flights will become more expensive, especially for
small aircrafts.
• Contrary to this, short-distance flights will become
cheaper, especially for large aircrafts.
• But in reality small air carriers don‘t do long-distance
flights, neither do large aircrafts short distance flights.
 Problems

• Hard to implement in reality.

• Have airports the marketpower to implement such
a pricing scheme?
• It is difficult to get the necessary data.
• Even if airports have the market power to do so, there
are legal barriers which prohibit charging different
prices for the same service
 Evaluation

In our opinion, some figures which Martin-Cejas

used could be improved:
– The elasticity should reflect airline‘s demand for
capacity, not passenger‘s.
– In Germany airports do not charge according to flight
distance, so this term should be replaced in the block
hour price-calculation as well.
– Generally it is doubtfull to use block hour costs for
handling an air carrier in this equatation
 Next Step

Apply same calculations for small, regional airports

• Calculate an airline-elasticity
• What are the effects of a pricing scheme based on
flight distance?
Who will get better/worse off by applying this approach?
 Pure Cost Plus
 Pure cost plus. The regulated firm simply submits a bill for its
operating expenses and capital costs (depreciation plus an after-
tax return on its investment that equals or exceeds its cost of
capital), and the regulator passes on these costs in the prices
charged to consumers. Prices are continuously tied to these
accounting costs.
 Rate of return. The regulated firm’s capital and operating costs
are evaluated using a specific accounting system. Prices are
then set to cover these audited costs plus a reasonable return on
investment.
 Once these base prices are set, they are not adjusted
automatically for changes in costs over time—they remain
fixed until the subsequent regulatory review.
Price Constraints Imposed by Price Cap Plans
Hybrid Regulatory Mechanisms
 Accounting Cost
 It is a traditional method that relies on accounting data to
formulate tariff structure. The accounting cost pricing has
limitation in controlling growth in peak demand by having a
uniform cost of electricity throughout the day. This threatens the
resource as if it is an abundant or as scarce as it was in the past
 The traditional accounting approach concerns with the recovery of
the sunk costs and is not consistent with the objective of efficient
recourse allocation Because of its backward looking approach,
accounting cost pricing creates the wrong impression about the
costs of the resources
 These rates are set based on the average value of the production
cost of electricity generated, transmitted and distributed
 These production costs consist of depreciation and financing costs,
operation and maintenance costs, wages/administrative costs, fuel
 costs, etc. The tariffs are then adjusted/modified for different
sectors and heavily subsidized for residential sector.