Second Best Pricing of Publically Produced Inputs: The Case of Downstream Imperfect Competition

Efficient second best pricing is examined for a public enterprise facing two distortions: a profit constraint and imperfect competition. We suggest a measure of downstream industry distortion for efficient pricing. The pricing rule constrains two elements: the shadow value of public profit and this measure of downstream distortion, whose sum determines whether the efficient second best input price is above or below marginal cost. Efficient pricing normally implies relative subsidization of imperfectly competitive downstream firms.