Average-cost Pricing, Increasing Returns, and Optimal Output: Comparing Home and Market Production |
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Authors: | Yew-Kwang Ng Dingsheng Zhang |
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Institution: | (1) Department of Economics, Monash University, Clayton, Vic., 3800, Australia;(2) Department of Economics, Monash University,;(3) China Economics and Management Academy, Central University of Finance and Economics, China |
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Abstract: | We employ a model with both market production and home production 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 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 subsidise 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 increase the degree of
increasing returns. |
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Keywords: | increasing returns average-cost pricing monopolistic competition home production optimal output fixed costs |
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