Surplus Maximization and Optimality
Edward Schlee*
Date: 2012-05-05 10:15 am – 10:45 am
Last modified: 2012-04-20
Abstract
Expected consumer's surplus rarely represents a consumer's preferences over price-income lotteries. Still, I find that policies which maximize expected surplus are interim Pareto Optimal under four assumptions. Two are strong but standard partial equilibrium assumptions: the policy affects only one price; and income changes do not affect demand. The two others are that every consumer's indirect utility function satisfies increasing differences in price and income; and policies order prices by a single-crossing property. I argue that increasing differences is plausible. The single-crossing property appears strong, but holds in important applications. I use the result to extend some well-known welfare results in Industrial Organization and Mechansim Design beyond the knife-edge case of quasilinear utility.