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Applied Welfare Economics$
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Chris Jones

Print publication date: 2005

Print ISBN-13: 9780199281978

Published to Oxford Scholarship Online: July 2005

DOI: 10.1093/0199281971.001.0001

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Conventional Shadow Prices

Conventional Shadow Prices

(p.42) 2 Conventional Shadow Prices
Applied Welfare Economics

Chris Jones (Contributor Webpage)

Oxford University Press

The formal analysis in this chapter lays the foundation for the welfare analysis in the remainder of the book. A conventional welfare equation for marginal policy changes is obtained in a competitive general equilibrium model of a tax-distorted closed economy. Initially, the distributional effects are removed by adopting the ‘dollar-is-a-dollar’ assumption used by Harberger. The analysis is extended in the following chapters to include distributional effects, time, internationally traded goods, externalities, non-competitive behaviour, price-quantity controls, public goods, and other market distortions. The Hatta decomposition is generalized to show that the shadow prices of goods are equal to their compensated shadow prices multiplied by the shadow value of government revenue. Any income effects are isolated in the shadow value of government revenue.

Keywords:   conventional welfare analysis, efficiency effects, Hatta decomposition, income effects, lump sum transfers, shadow prices, shadow value of government revenue

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