Surplus Maximization and Optimality

Expected consumer's surplus rarely represents preferences over price lotteries. Still, I give sufficient conditions for policies which maximize aggregate expected surplus to be interim Pareto Optimal. Besides two standard partial equilibrium conditions, I assume that feasible prices satisfy a s...

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Bibliographic Details
Published in:The American economic review 2013-10, Vol.103 (6), p.2585-2611
Main Author: Schlee, Edward E.
Format: Article
Language:English
Subjects:
Aggregate surplus
Consumer economics
Consumer equilibrium
Consumer preferences
Consumer prices
Consumer surplus
Consumers
Economic models
Economic statistics
Economic theory
Economic uncertainty
Equilibrium
Income
Income distribution
Lotteries
Microeconomics
Monopolies
Optimization
Pareto efficiency
Pareto optimum
Preferences
Prices
Resale price maintenance
Risk aversion
Shorter Papers
Studies
Surplus
Utility functions
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Summary:Expected consumer's surplus rarely represents preferences over price lotteries. Still, I give sufficient conditions for policies which maximize aggregate expected surplus to be interim Pareto Optimal. Besides two standard partial equilibrium conditions, I assume that feasible prices satisfy a single-crossing property; and each consumer's indirect utility satisfies increasing differences in the price and income. I use the result to extend well-known welfare conclusions beyond the knife-edge quasilinear utility case. Since increasing differences puts no upper bound on risk aversion, the result is useful for applications in which risk aversion is important. (JEL D11, D24, D42, D81, D83, L42) [PUBLICATION ABSTRACT]
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.103.6.2585