A government's political preference function embodies political powers
among competing interest groups. This paper constructs a model of competition
among interest groups and employs the political preference function to study a
2-class customer (households vs. private firms) public pricing problem. We
analyse the relationship between the political preference function and three
forms of pricing rule- profit maximization, marginal cost and Ramsey. The focus
of the analysis is on the structure of political power behind these three forms
of pricing rule. Our main finding is: The second-best Ramsey prices will be
enforced in a political process only if either (i) keeping a balanced political
power marginally between laborers and capitalists, or (ii) internalizing the
conflicting interests between laborers and capitalists.