Economies of scale and self-financing rules with non-competitive factor markets

When a firm or public enterprise prices output at marginal cost, its profit s are related to the degree of local scale economies in its cost function. I show that contrary to common belief, this result holds even when scale ec onomies are affected by a rising factor supply curve. Thus marginal-cost pr icing may be profitable even with constant returns to scale. Examples are p rovided for a monopsonist both with and without price discrimination, and f or a case such as highways where congestion-prone inputs are supplied by us ers. Court rulings governing land purchase for highways illustrate: the app licability of the results. (C) 1999 Elsevier Science S.A. All rights reserv ed.