Pricing rules for public sector commodities are derived for an economy with distributional preferences of government and flexible production structure. An attempt is made to estimate optimal price structure for the electricity supply in India using these pricing rules. An estimate of the cost function of electricity shows that there are increasing returns to scale in electricity production in India which points out an important limitation on the studies of optimal public sector pricing and commodity taxes with constant returns to scale assumption for the Indian economy.
R. Jha and Maddipati Narsimha Murty, “Distributional equity and optimal prices for the public sector: The flexible coefficients case”, Energy Economics, vol. 9, pp. 46 - 54, 1987.