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Shadow Prices for a Nonconvex Public Technology in the Presence of Private Constant Returns


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  • John A. Weymark

    (Department of Economics, Vanderbilt University)


Diamond and Mirrlees have shown that public sector shadow prices should be set equal to the private producer prices in some circumstances even if taxes are not optimal when the public production technology is convex and some of the private sector firms have constant-returns-to-scale technologies. In this article, it is shown that the optimal public production plan maximizes profits using the private producer prices on a subset of the public production set if this set is nonconvex. Sufficient conditions for profit maximization using these prices to identify the optimal public production plan on the whole public production set are also identified.

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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0501.

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Date of creation: Jan 2005
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Handle: RePEc:van:wpaper:0501

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Keywords: Shadow prices; public sector pricing; Diamond and Mirrlees;

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  1. Diamond, P A & Mirrlees, James A, 1976. "Private Constant Returns and Public Shadow Prices," Review of Economic Studies, Wiley Blackwell, vol. 43(1), pages 41-47, February.
  2. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Guesnerie, Roger, 1979. "General statements on second best pareto optimality," Journal of Mathematical Economics, Elsevier, vol. 6(2), pages 169-194, July.
  4. Bos, Dieter, 1985. "Public sector pricing," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 3, pages 129-211 Elsevier.
  5. Weymark, John A, 1981. "On Sums of Production Set Frontiers," Review of Economic Studies, Wiley Blackwell, vol. 48(1), pages 179-83, January.
  6. Moore, James C & Whinston, Andrew B & Wu, Joseph S, 1972. "Resource Allocation in a Non-convex Economy," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 303-23, July.
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