Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2012

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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.

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