Increasing Returns and Efficiency

By Martine Quinzii | Go to book overview

PREFACE

This monograph studies the theory of resource allocation in an economy with increasing returns. Its focus is on the problem of achieving efficient allocations through a mechanism that is as decentralized as possible. Since efficiency cannot be achieved if increasing returns firms are permitted to exploit their monopoly power, such firms must be subject to some measure of regulation. The economy thus consists of two sectors: a private sector with consumers and competitive firms with decreasing returns and a public sector consisting of regulated firms producing with increasing returns. The problem reduces to studying how a price system can coordinate the activities of these two sectors.

The objective of efficiency leads to the concept of a marginal cost pricing equilibrium which is a natural extension of the classical concept of a competitive equilibrium. Even though this concept is motivated by considerations of efficiency, the resulting equilibria are not necessarily efficient. In contrast with a convex economy, conditions of compatibility between the supply and demand for the commodities produced by the public sector are needed to ensure that equilibria are efficient.

Marginal cost pricing introduces a second problem which is not encountered in convex economies, the need to finance the deficit of the public sector. Finding ways of financing the deficit which are acceptable to all agents and more generally to all subgroups of agents leads naturally to the abstract problem of finding allocations which lie in the core of an economy with increasing returns. Once again conditions of compability between the supply and demand sides of the public sector are needed to ensure that core allocations exist.

Here in short is the content of this monograph. While the formal analysis proceeds with the standards of rigor expected of modern theoretical economics, I have attempted to keep the discussion and exposition of the key ideas as intuitive as possible. Simple examples and a geometric approach are used to illustrate basic points and to motivate the reader's intuition. While based on the work of this author, this monograph also draws extensively on the recent literature on increasing returns. Since some of this literature is quite technical the intuitive and geometric approach emphasised in this monograph should provide a more accessible account of recent developments in this field.

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Increasing Returns and Efficiency
Table of contents

Table of contents

  • Title Page iii
  • Preface v
  • Contents vii
  • 1: Introduction 3
  • Notes 10
  • 2 - Necessary Conditions for Efficiency 13
  • 3 - Marginal Cost Pricing Equilibrium 27
  • 4 - Efficiency 41
  • 5 - Existence 77
  • 6 - The Core 101
  • Notes 152
  • 7 - Conclusion 153
  • References 155
  • Index 161
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