IDEAS home Printed from https://ideas.repec.org/a/kap/jeczfn/v90y2007i2p167-192.html
   My bibliography  Save this article

Average-cost Pricing, Increasing Returns, and Optimal Output: Comparing Home and Market Production

Author

Listed:
  • Yew-Kwang Ng
  • Dingsheng Zhang

Abstract

A model with both market production and home production is used to show that, ignoring administrative costs and indirect effects (such as rent-seeking), even if both the home and the market sectors have the condition 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. This under-production is 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 subsidize more the sector with a higher fixed cost, a lower elasticity of substitution between goods (higher value of diversity), and a lower degree of importance in preference which all increases the degree of increasing returns.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Yew-Kwang Ng & Dingsheng Zhang, 2007. "Average-cost Pricing, Increasing Returns, and Optimal Output: Comparing Home and Market Production," Journal of Economics, Springer, vol. 90(2), pages 167-192, March.
  • Handle: RePEc:kap:jeczfn:v:90:y:2007:i:2:p:167-192
    DOI: 10.1007/s00712-006-0229-z
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00712-006-0229-z
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1007/s00712-006-0229-z?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kenneth J. Arrow, 1995. "Returns to Scale, Information and Economic Growth," Palgrave Macmillan Books, in: Bon Ho Koo & Dwight H. Perkins (ed.), Social Capability and Long-Term Economic Growth, chapter 2, pages 11-18, Palgrave Macmillan.
    2. Geoffrey Heal (ed.), 1999. "The Economics of Increasing Returns," Books, Edward Elgar Publishing, number 1041.
    3. Heal, G.M., 1997. "The Economics of Increasing Returns," Papers 97-20, Columbia - Graduate School of Business.
    4. Bon Ho Koo & Dwight H. Perkins (ed.), 1995. "Social Capability and Long-Term Economic Growth," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-13512-7, December.
    5. Paul Krugman, 1982. "Trade in Differentiated Products and the Political Economy of Trade Liberalization," NBER Chapters, in: Import Competition and Response, pages 197-222, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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


    Cited by:

    1. Zhang, Dingsheng & Cheng, Wenli & Ng, Yew-Kwang, 2013. "Increasing returns, land use controls and housing prices in China," Economic Modelling, Elsevier, vol. 31(C), pages 789-795.
    2. Dingsheng Zhang & Wenli Cheng & Yew-Kwang Ng, 2012. "Increasing Returns, Land Use Controls and Housing Prices," Monash Economics Working Papers 12-14, Monash University, Department of Economics.
    3. W. Max Corden & Peter Forsyth & Christis G. Tombazos, 2008. "Distinguished Fellow of the Economic Society of Australia, 2007: Yew‐Kwang Ng," The Economic Record, The Economic Society of Australia, vol. 84(265), pages 267-272, June.
    4. Shi, Hui, 2012. "The efficiency of government promotion of inbound tourism: The case of Australia," Economic Modelling, Elsevier, vol. 29(6), pages 2711-2718.
    5. Wenli Cheng & Dingsheng Zhang, 2021. "Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns," Annals of Economics and Finance, Society for AEF, vol. 22(2), pages 525-540, November.
    6. Andreas Wagener, 2010. "Ng, Y.-K.: Increasing returns and economic efficiency," Journal of Economics, Springer, vol. 100(1), pages 85-89, May.
    7. Christopher Colburn & Haiwen Zhou, 2022. "The partition of production between households and markets," International Studies of Economics, John Wiley & Sons, vol. 17(1), pages 21-35, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Catherine Bobtcheff & Christian Gollier & Richard Zeckhauser, 2008. "Resource allocations when projects have ranges of increasing returns," Journal of Risk and Uncertainty, Springer, vol. 37(1), pages 93-93, August.
    2. Murty, Sushama, 2010. "Externalities and fundamental nonconvexities: A reconciliation of approaches to general equilibrium externality modeling and implications for decentralization," Journal of Economic Theory, Elsevier, vol. 145(1), pages 331-353, January.
    3. Alexis Habiyaremye, 2008. "Economic Proximity and Technology Flows: South Africa's Influence and the Role of Technological Interaction in Botswana's Diversification Effort," WIDER Working Paper Series RP2008-92, World Institute for Development Economic Research (UNU-WIDER).
    4. Areendam Chanda & Louis Putterman, 2007. "Early Starts, Reversals and Catch‐up in the Process of Economic Development," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 387-413, June.
    5. Broll, Udo & Gilroy, Bernard Michael, 1985. "International Division of Labour and Intra-Trade," MPRA Paper 18042, University Library of Munich, Germany.
    6. Seelos, Christian & Mair, Johanna, 2005. "Sustainable development: How social entrepreneurs make it happen," IESE Research Papers D/611, IESE Business School.
    7. Intarakumnerd, Patarapong & Chairatana, Pun-arj & Tangchitpiboon, Tipawan, 2002. "National innovation system in less successful developing countries: the case of Thailand," Research Policy, Elsevier, vol. 31(8-9), pages 1445-1457, December.
    8. Aouatif El Fakir, 2008. "South Korean System of Innovation: From Imitation to Frontiers of Technology, Successes and Limitations," Post-Print hal-01347728, HAL.
    9. Rajneesh Narula, 2004. "Understanding absorptive capacities in an "innovation systems" context consequences for economic and employment growth," DRUID Working Papers 04-02, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    10. Loren Brandt & Debin Ma & Thomas G. Rawski, 2014. "From Divergence to Convergence: Reevaluating the History behind China's Economic Boom," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 45-123, March.
    11. Na-Allah, Abdelrasaq & Muchie, Mammo, 2012. "Social absorption capability, systems of innovation and manufactured export response to preferential trade incentives," Research Policy, Elsevier, vol. 41(1), pages 93-101.
    12. Slavo Radosevic & Esin Yoruk, 2014. "Are there global shifts in the world science base? Analysing the catching up and falling behind of world regions," Scientometrics, Springer;Akadémiai Kiadó, vol. 101(3), pages 1897-1924, December.
    13. Rajneesh Narula, 2015. "The Importance of Domestic Capabilities for FDI-assisted Development: Lessons from Asia and Latin America," John H Dunning Centre for International Business Discussion Papers jhd-dp2015-05, Henley Business School, University of Reading.
    14. Chang-Yung Liu & Jie Yang, 2003. "A Comparative Analysis On Technology Innovation & Diffusion System And Industrial Innovation Between Taiwan And Mainland China," International Journal of Innovation Management (ijim), World Scientific Publishing Co. Pte. Ltd., vol. 7(04), pages 443-473.
    15. Pattravadee Ploykitikoon & Charles M. Weber, 2019. "Knowledge Pathways and Performance: An Empirical Study of the National Laboratories in a Technology Latecomer Country," International Journal of Innovation and Technology Management (IJITM), World Scientific Publishing Co. Pte. Ltd., vol. 16(03), pages 1-37, May.
    16. Ahmed, Elsadig Musa, 2012. "Are the FDI inflow spillover effects on Malaysia's economic growth input driven?," Economic Modelling, Elsevier, vol. 29(4), pages 1498-1504.
    17. Simon Gilchrist & John C. Williams, 2001. "Transition Dynamics in Vintage Capital Models: Explaining the Postwar Catch-up of Germany and Japan," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-113, Boston University - Department of Economics.
    18. Justin Yifu Lin, 2007. "Development and Transition : Idea, Strategy, and Viability," Development Economics Working Papers 22709, East Asian Bureau of Economic Research.
    19. Michael H Grote & Florian A Täube, 2006. "Offshoring the Financial Services Industry: Implications for the Evolution of Indian IT Clusters," Environment and Planning A, , vol. 38(7), pages 1287-1305, July.
    20. Eichengreen, Barry & Kohl, Richard, 1998. "The External Sector, the State and Development in Eastern Europe," CEPR Discussion Papers 1904, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    increasing returns; average-cost pricing; monopolistic competition; home production; optimal output; fixed costs; D43; H21; L11;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    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:kap:jeczfn:v:90:y:2007:i:2:p:167-192. See general information about how to correct material in RePEc.

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.