Shadow Prices for a Nonconvex Public Technology in the Presence of Private Constant Returns
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.
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- Diamond, P A & Mirrlees, James A, 1976.
"Private Constant Returns and Public Shadow Prices,"
Review of Economic Studies,
Wiley Blackwell, vol. 43(1), pages 41-47, February.
- Guesnerie, Roger, 1979. "General statements on second best pareto optimality," Journal of Mathematical Economics, Elsevier, vol. 6(2), pages 169-194, July.
- Moore, James C & Whinston, Andrew B & Wu, Joseph S, 1972. "Resource Allocation in a Non-convex Economy," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 303-23, July.
- Weymark, John A, 1981. "On Sums of Production Set Frontiers," Review of Economic Studies, Wiley Blackwell, vol. 48(1), pages 179-83, January.
- Bos, Dieter, 1985. "Public sector pricing," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 3, pages 129-211 Elsevier.
- Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
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