Surplus Maximization and Optimality

Schlee, Edward E.

doi:10.1257/aer.103.6.2585

Cited by 9 publications

(4 citation statements)

References 28 publications

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“…However, in the case of a private good, there may be excess supply at the price set. In development of Weitzman's framework, Laffont (1977) argues that the price control could instead be announced to consumers, who determine the level of output that maximizes their benefit, net of price (see also Schlee, 2013). The information is transmitted to producers, who are assumed to make this level of output (we call this demand‐side price control).…”

Section: Introductionmentioning

confidence: 99%

Rationed price controls and “prices versus quantities”

Bennett

2022

J Public Economic Theory

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We interpret Weitzman's prices‐versus‐quantities model as applying to a private‐good market, and we formulate a “rationed price control,” with quantity determined endogenously as the minimum of supply and demand. With efficient rationing and no externalities, the optimal rationed price control exceeds the price at the expected demand–supply intersection if (the numerical value of) the demand slope curve exceeds the supply slope, and is less than this level for the reverse ordering of slopes. If uncertain demand is steeper than deterministic supply, or if uncertain supply is steeper than deterministic demand, expected welfare is greater with the optimal rationed price control than with the optimal quantity control. We obtain, for any specified price level, a partial ranking of the rationed price control and alternative simple price controls. Extending the model to incorporate externalities, we show that, for demand steeper than supply, with a negative externality on either benefit or cost, the optimal rationed price control exceeds the price at the expected intersection of marginal social benefit and marginal social cost; a converse result also obtains. For an example with inefficient rationing, we show that the optimal pure price control always exceeds the price at the expected intersection of demand and supply.

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Section: Introductionmentioning

confidence: 99%

Rationed price controls and “prices versus quantities”

Bennett

2022

J Public Economic Theory

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“…For example,Harberger (1971),Willig (1976),Tirole (1988, pp. 7-13),Weitzman (1988),Vives (1999, chapter 3),Schlee (2013), andHayashi (2017).24 Unfortunately,Khan and Schlee (2017) omit explicit mention of this last assumption.25 The Finetti-Fenchel-Kannai examples highlight how a convex preference relation may not have a concave representation for precisely such plausible preference orderings; seeKannai (1977) for some examples and the antecedent background.26 If the consumer has expected utility preferences and we interpret u as a von Neumann-Morgenstern utility, this fact implies that aversion for wealth risk follows from aversion for consumption risk; seeKreps (2013, Proposition 6.16, p. 136).27 For two continuous real-valued functions f and g on a convex set, D ⊆ R n that represent the same binary relation , g is less concave than f if there is a convex, and strictly increasing, real-valued function T on Range( f ) that is convex with g = T • f .28 For what it is worth, it was reflection on Samuelson's assertions about local concavity of money metric that led us to think about what global properties of concave functions, if any, that it possesses, independently of differentiability and interiority assumptions, and led us thereby to saddlepoints.…”

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confidence: 99%

Money Metrics in Applied Welfare Analysis: A Saddlepoint Rehabilitation

Schleeand

Khan

2021

Int Economic Review

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Once a popular tool to estimate welfare changes, the money metric of McKenzie-Samuelson gradually faded from use after welfare theorists and practitioners argued that it led to inegalitarian recommendations. We prove that, at a competitive equilibrium price, any associated competitive allocation maximizes the moneymetric sum; and, as is well understood, competitive allocations can be egalitarian or inegalitarian. The result applies to economies in which individual demand is not rationalizable by any binary relation, let alone a binary relation representable by a utility function, a behavioral setting considered, for example, in Bernheim-Rangel.

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“…The framework has since been adapted to various contexts, including monopoly regulation in a mixed economy and environmental policy, but it has not, to our knowledge, been applied to the labor market. For a recent formulation, see Schlee ().…”

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confidence: 99%

The optimal minimum wage with regulatory uncertainty

Bennett

Chioveanu

2017

J Public Economic Theory

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We thank the Editor Rabah Amir, an associate editor, and a referee for helpful comments. We are also grateful for discussions with Volker Hahn, Hartmut Lehmann, and participants at PET 2015, Luxembourg, and the 10th Annual CEDI Conference, Brunel University, 2015. The usual disclaimer applies.For two different regulatory standards, we examine the optimal minimum wage in a competitive labor market when the government is uncertain about supply and demand. Solutions are related to underlying supply and demand conditions, and to the extent of uncertainty and of rationing efficiency. With expected earnings maximization, greater uncertainty widens the range of parameter values for which a minimum wage should be set. With expected worker surplus maximization and sufficiently efficient rationing, a minimum wage should always be set. However, in both cases regulatory uncertainty may require a low minimum wage that may not bind in equilibrium.

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Surplus Maximization and Optimality

Cited by 9 publications

References 28 publications

Rationed price controls and “prices versus quantities”

Rationed price controls and “prices versus quantities”

Money Metrics in Applied Welfare Analysis: A Saddlepoint Rehabilitation

The optimal minimum wage with regulatory uncertainty

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