Allocating the common costs of a public service operator: An axiomatic approach

Abstract

Accurate cost allocation is a challenge for both public service operators and regulatory bodies, given the dual objectives of ensuring essential public service provision and maintaining fair competition. Operators have the obligation to provide essential public services for all individuals, which may incur additional costs. To compensate this, the operators receive state aids, which are determined by an assessment of the net cost associated with these obligations. However, these aids introduce the risk of distorting competition, as operators may employ them to subsidize competitive activities. To avoid this risk, a precise cost allocation method that adequately assess the net cost of these obligations becomes necessary. Such a method must satisfy specific properties that effectively prevent cross-subsidization. In this paper, we propose a method grounded in cooperative game theory that offers a solution for allocating common costs between activities and obligations in public service provision. We adopt a normative approach by introducing a set of desirable axioms that prevent cross-subsidization. We provide two characterizations of our proposed solution on the basis of these axioms. Furthermore, we present an illustration of our method to the allocation of common costs for a public service operator.