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Increasing Returns and Efficiency$
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Martine Quinzii

Print publication date: 1993

Print ISBN-13: 9780195065534

Published to Oxford Scholarship Online: October 2011

DOI: 10.1093/acprof:oso/9780195065534.001.0001

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Necessary Conditions for Efficiency

Necessary Conditions for Efficiency

(p.12) (p.13) 2 Necessary Conditions for Efficiency
Increasing Returns and Efficiency

Martine Quinzii

Oxford University Press

This chapter discusses the general equilibrium version of the marginal cost principle, which asserts that marginal cost pricing is a necessary condition for efficiency. It shows that to every Pareto optimal allocation is associated a price system that supports this allocation in a sense which is made precise. Under certain conditions, this price system is such that the price of each good equals its marginal cost. The model considered is a natural extension of the standard general equilibrium model of a production economy. The idea is to provide conditions on agents' characteristics under which the Second Welfare Theorem can be extended to non-convex economies. The chapter shows that an efficient allocation can be supported by a price vector orthogonal to the agents' indifference curves and to the frontiers of the production sets, provided that the appropriate concept of a normal cone is used for the production sets. An assumption of convexity of the input requirement sets of firms is needed to ensure that this property of orthogonality can be interpreted as the equalization of prices to marginal costs.

Keywords:   general equilibrium, efficiency, marginal cost, pricing, Pareto, production economy, Second Welfare, non-convex economies, normal cone, marginal costs

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