On the Social Efficiency in Monopolistic Competition Models

We consider standard monopolistic competition models in the spirit of Dixit and Stiglitz or Melitz with aggregate consumer's preferences defined by two wellknown classes of utility functions – the implicitly defined Kimball utility function and the variable elasticity of substitution utility function. These two classes generalize classical constant elasticity of substitution utility function and overcome its lack of flexibility. It is shown in [Dhingra, Morrow, 2012] that for the monopolistic competition model with aggregate consumer’s preferences defined by the variable elasticity of substitution utility function the laissez-faire equilibrium is efficient (i.e. coincides with social welfare state) only for the special case of constant elasticity of substitution utility function. We prove that the constant elasticity of substitution utility function is also the only one which leads to efficient laissezfaire equilibrium in the monopolistic competition model with aggregate consumer’s preferences defined by the utility function from the Kimball class. Our main result is following: we find that in both cases a special tax on firms' output may be introduced such that market equilibrium becomes socially efficient. In both cases this tax is calculated up to an arbitrary constant, and some considerations about the «most reasonable» value of this constant are presented.