Financing a Nationalized Monopoly: Coase's Versus Hotelling-Lerner's Solution

Abstract

In 1946, Coase rejected Hotelling-Lerner's solution for financing a nationalized monopoly on the grounds that any tax structure could distort relative prices. In monopoly where two-part tariffs are infeasible, Coase suggested average cost pricing as a noninfenor solution to the above policy. This article shows that, in a general equilibrium model, it is possible to choose a distortionary Hotelling-Lerner's tax policy that is superior to average cost pricing.