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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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Marginal Cost Pricing Equilibrium

Marginal Cost Pricing Equilibrium

(p.27) 3 Marginal Cost Pricing Equilibrium
Increasing Returns and Efficiency

Martine Quinzii

Oxford University Press

This chapter shows how first order-conditions for optimality lead naturally to a concept of equilibrium, which has come to be known as a marginal cost pricing equilibrium. Two conceptual difficulties emerge. The first concerns the practical issue of how firms with non-convex technology sets should be administered so that the prices of their outputs are set equal to their marginal costs. The second concerns the appropriate specification of a rule by which income is assigned to consumers. Such a rule needs to be defined in order to close the model and any such rule necessarily carries with it an explicit or implicit specification of the way the deficits of firms with increasing returns technologies are covered. In principle, an efficient allocation could be obtained in a totally planned economy if the planning board, perfectly informed of the characteristics of all consumers and firms, decides on the production plans of firms and the consumptions of the agents.

Keywords:   optimality, cost pricing, efficient allocation, non-convex technology, marginal costs, prices, consumers, income, deficits, increasing returns

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