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Optimal Public Rationing and Price Response

  • Simona Grassi

    ()

    (Max Weber Fellow, European University Institute)

  • Ching-to Albert Ma

    ()

    (Department of Economics, Boston University)

We study optimal public rationing of an indivisible good and private sector price responses. Consumers differ in their wealth and costs of provisions. Due to a limited budget, some consumers must be rationed. Public rationing determines the characteristics of consumers who seek supply from the private sector, where a firm sets prices based on consumers’ cost information and in response to the rationing rule. We consider two information regimes. In the first, the public supplier rations consumers according to their wealth information. In equilibrium, the public supplier must ration both rich and poor consumers. Supplying all poor consumers would leave only rich consumers in the private market, and the firm would react by setting a high price. Rationing some poor consumers is optimal, and implements price reduction in the private market. In the second information regime, the public supplier rations consumers according to consumers’ wealth and cost information. In equilibrium, consumers are allocated the good if and only if their costs are below a threshold. Wealth information is not used. Rationing based on cost results in higher equilibrium total consumer surplus than rationing based on wealth.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2009-008.

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Length: 32
Date of creation:
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Handle: RePEc:bos:wpaper:wp2009-008
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  4. Ching-to Albert MA & Simona Grassi, 2010. "Optimal public rationing and price response," Boston University - Department of Economics - Working Papers Series WP2010-024, Boston University - Department of Economics.
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  13. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
  14. de Fraja, Giovanni & Delbono, Flavio, 1990. " Game Theoretic Models of Mixed Oligopoly," Journal of Economic Surveys, Wiley Blackwell, vol. 4(1), pages 1-17.
  15. Simona Grassi & Ching-to Albert Ma, 2009. "Public Sector Rationing and Private Sector Selection," Boston University - Department of Economics - Working Papers Series wp2009-a, Boston University - Department of Economics.
  16. Cremer, Helmuth & Marchand, Maurice & Thisse, Jacques-Francois, 1991. "Mixed oligopoly with differentiated products," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 43-53, March.
  17. Gruber, Jonathan & Simon, Kosali, 2008. "Crowd-out 10 years later: Have recent public insurance expansions crowded out private health insurance?," Journal of Health Economics, Elsevier, vol. 27(2), pages 201-217, March.
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