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Duke Economics Working Paper #97-21

Distributive and Additive Costsharing of an Homogeneous Good

Hervé Moulin and Scott Shenker

Abstract

We consider the sharing of the cost of producing a homogeneous good when the technology has variable returns and individuals have arbitrary demands. We give a full analytical description of the family of costsharing methods that allocate costs in propor tion to demands when returns are constant, and commute with the additivity and composition of cost functions.

Two prominent methods in this family are average cost pricing and incremental costsharing. We show that all other methods in the family combine elements of the average cost and incremental ones. Serial costsharing stands out prominently in the family, w hereas the Shapley-Shubik method, and all values from the associated stand alone cooperative games, are excluded.

JEL: D63, C71

Published in Games and Economic Behavior, Vol. 27, No. 2, May 1999, pp. 299-330.