IDEAS home Printed from
   My bibliography  Save this paper

Average-cost Pricing, Increasing Returns, and Optimal Output in a Model With Home and Market Production


  • Dingsheng Zhang
  • Yew-Kwang Ng


The analysis of economies of specialization at the individual level by Yang & Shi (1992) and Yang & Ng (1993) is combined with the Dixit & Stiglitz (1977) analysis of monopolistic-competitive firms to show that, ignoring administrative costs and indirect effects (such as rent-seeking), even if both the home and the market sectors are produced under conditions of increasing returns and there are no pre-existing taxes, it is still efficient to tax the home sector to finance a subsidy on the market sector to offset the under-production of the latter due to the failure of price-taking consumers to take account of the effects of higher consumption in reducing the average costs and hence prices, through increasing returns or the publicness nature of fixed costs. Within market production, it is efficient to subsidise more the sector with a higher fixed cost, a lower elasticity of substitution between goods, and a lower degree of importance in preference which all increases the degree of increasing returns.

Suggested Citation

  • Dingsheng Zhang & Yew-Kwang Ng, 2004. "Average-cost Pricing, Increasing Returns, and Optimal Output in a Model With Home and Market Production," Econometric Society 2004 Australasian Meetings 322, Econometric Society.
  • Handle: RePEc:ecm:ausm04:322

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Shi, Hui, 2012. "The efficiency of government promotion of inbound tourism: The case of Australia," Economic Modelling, Elsevier, vol. 29(6), pages 2711-2718.
    2. Yew-Kwang Ng, 2006. "Do the Economies of Specialization Justify the Work Ethics? A Further Examination of Buchanan's Hypothesis," Annals of Economics and Finance, Society for AEF, vol. 7(2), pages 385-403, November.

    More about this item


    increasing returns; average-cost pricing; monopolistic competition; home production; optimal output; fixed costs.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:ausm04:322. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.