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

Author

Listed:
  • John A. Weymark

    () (Department of Economics, Vanderbilt University)

Abstract

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.

Suggested Citation

  • John A. Weymark, 2005. "Shadow Prices for a Nonconvex Public Technology in the Presence of Private Constant Returns," Vanderbilt University Department of Economics Working Papers 0501, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:0501
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    File URL: http://www.accessecon.com/pubs/VUECON/vu05-w01.pdf
    File Function: First version, 2005
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    More about this item

    Keywords

    Shadow prices; public sector pricing; Diamond and Mirrlees;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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