Public Sector Pricing,Capital Mobility and National Income: A Two‐Sector General‐Equilibrium Analysis

Abstract This paper examines the resource allocation and income effects of public‐sector pricing. During the short run, raising public‐sector prices leads to a worsening in public‐sector efficiency, causing a decline in GNP. In the intermediate run, the policy begins to improve public‐sector efficiency and, hence, increases GNP. At the outset of the transition to a steady state, the pricing policy continues to improve efficiency. Nevertheless, efficiency and GNP remain invariant across steady states in the long‐run equilibrium. The implications of the pricing policy are also discussed.