Question

Do the Ramsey prices need to be raised to avoid cross-subsidy?

Answer 1

Cross-subsidy is a pricing practice where the firm charges higher prices to one section of the consumer and subsidize the other section of the consumer. This practice is mostly seen in the firms having natural monopoly power. But suct actily leads to a welfare loss of the people. We can take the example of state electricity distribution company. They charges higher price from the consumers who uses for commercial purposes and subsidize the residential consumers.

Yes, Ramsey pricing is an approach which solve the difficulty created because of the cross-subsidy. Pricing under Ramsey pricing approach suggest that the enterprice must respect a breakeven and marginal cost pricing would generate losses. It suggest that the objective of the firm should be the maximisation of the social welfare (Producer surplue and producers surplus). Also, the firms must set a price such that the subsidy can be withdrawn and the price for the commercial user must be reduced. That will maximise the social welfare.

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