Welfare and efficiency in incomplete market economies with a single firm
In the quasilinear case, surplus maximization leads to constrained efficient Drèze equilibria. We investigate the question of whether surplus maximization can be useful beyond the quasilinear case. We use two different surplus concepts, the equivalent and the compensating surplus. The first one is a utilitarian social welfare function and the second one a measure of inefficiency. We show that social welfare maximization can be at odds with constrained efficiency. In particular, a unique Drèze equilibrium can maximize welfare although it is not minimally constrained efficient. The Drèze equilibrium can also minimize welfare although it entails no efficiency losses. We argue that the two surplus concepts should be used together and that they can help to distinguish between different Drèze equilibria on welfare and efficiency grounds.
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- Maskin, Eric, 1978. "A Theorem on Utilitarianism," Review of Economic Studies, Wiley Blackwell, vol. 45(1), pages 93-96, February.
- Egbert Dierker & Hildegard Dierker, 2010. "Drèze equilibria and welfare maxima," Economic Theory, Springer, vol. 45(1), pages 55-63, October.
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"Are Incomplete Markets Able to Achieve Minimal Efficiency?,"
03-09, University of Copenhagen. Department of Economics.
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