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Welfare and efficiency in incomplete market economies with a single firm

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  • Dierker, Egbert
  • Dierker, Hildegard

Abstract

In the quasilinear case, surplus maximization leads to constrained efficient Drèze equilibria. We investigate the question of whether surplus maximization can be useful beyond the quasilinear case. We use two different surplus concepts, the equivalent and the compensating surplus. The first one is a utilitarian social welfare function and the second one a measure of inefficiency. We show that social welfare maximization can be at odds with constrained efficiency. In particular, a unique Drèze equilibrium can maximize welfare although it is not minimally constrained efficient. The Drèze equilibrium can also minimize welfare although it entails no efficiency losses. We argue that the two surplus concepts should be used together and that they can help to distinguish between different Drèze equilibria on welfare and efficiency grounds.

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  • Dierker, Egbert & Dierker, Hildegard, 2010. "Welfare and efficiency in incomplete market economies with a single firm," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 652-665, September.
    • Handle: RePEc:eee:mateco:v:46:y:2010:i:5:p:652-665
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    References listed on IDEAS

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    1. Deschamps, Robert & Gevers, Louis, 1978. "Leximin and utilitarian rules: A joint characterization," Journal of Economic Theory, Elsevier, vol. 17(2), pages 143-163, April.
    2. Egbert Dierker & Hildegard Dierker, 2010. "Drèze equilibria and welfare maxima," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 45(1), pages 55-63, October.
    3. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2006. "Are Incomplete Markets Able to Achieve Minimal Efficiency?," Studies in Economic Theory, in: Christian Schultz & Karl Vind (ed.), Institutions, Equilibria and Efficiency, chapter 7, pages 117-129, Springer.
    4. Eric Maskin, 1978. "A Theorem on Utilitarianism," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(1), pages 93-96.
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    Cited by:

    1. Zierhut, Michael, 2019. "Nonexistence of constrained efficient production plans," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 127-136.
    2. Egbert Dierker, 2015. "A multiperiod Drèze rule," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 129-151, October.
    3. Egbert Dierker, 2018. "Initial shares can cause Pareto improvements when markets are incomplete," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 171-181, October.
    4. Michael Zierhut, 2021. "Indeterminacy of Cournot–Walras equilibrium with incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(1), pages 81-114, February.
    5. Egbert Dierker & Hildegard Dierker, 2012. "Ownership structure and control in incomplete market economies with transferable utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(3), pages 713-728, November.

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