Public enterprise pricing as redistributive policy

Abstract This paper analyzes public enterprise pricing as a form of redistributive politics. Beyond regulation and public goods, governments provide goods and services on a fee‐for‐service basis. Governments recover all or part of the costs of these services through user charges. These charges distribute costs to users in different ways, depending on how they are structured. As such, public enterprise pricing can be a form of redistributive policy similar to taxation, with governments setting prices more or less progressively. Adapting a classic model of taxation, we argue that democratic governments respond to increasing income inequality by setting public enterprise prices more progressively. The regulatory commissioners who set prices for private utilities have less incentive to respond to voter preferences and so are less likely to respond to local income inequality with progressive pricing. Analysis of pricing in US water utilities affirms that local income inequality correlates with the progressivity of water prices for local government utilities in ways that are consistent with the political logic of redistributive policy. We find no correlation between income inequality and progressivity for private utilities. These findings highlight the importance of understanding government enterprise prices as public policy and demonstrate the applicability of a classic political economy model to local government.