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Monopoly and Soft Budget Constraint Author info | Abstract | Publisher info | Download info | Related research | Statistics Ilya R. Segal
A benevolent government may decide to subsidize an unprofitable monopoly whose profits do not capture all the social surplus from its production. Anticipating this, the firm may underinvest in order to become unprofitable and extract state subsidies. The resulting welfare loss may exceed by many times the deadweight cost of monopoly pricing. Committing the firm to a price ceiling may soften its budget constraint and thus reduce welfare. Competition can harden budget constraints in industries in which free entry is socially excessive.
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Article provided by The RAND Corporation in its journal RAND Journal of Economics .
Volume (Year): 29 (1998)
Issue (Month): 3 (Autumn)
Pages: 596-609
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Handle: RePEc:rje:randje:v:29:y:1998:i:autumn:p:596-609Contact details of provider: Web page: http://www.rje.org
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