Shadow Prices for a Nonconvex Public Technology in the Presence of Private Constant Returns

John Weymark

No 501, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: Diamond and Mirrlees have shown that public sector shadow prices should be set equal to the private producer prices in some circumstances even if taxes are not optimal when the public production technology is convex and some of the private sector firms have constant-returns-to-scale technologies. In this article, it is shown that the optimal public production plan maximizes profits using the private producer prices on a subset of the public production set if this set is nonconvex. Sufficient conditions for profit maximization using these prices to identify the optimal public production plan on the whole public production set are also identified.

Keywords: Shadow prices; public sector pricing; Diamond and Mirrlees (search for similar items in EconPapers)
JEL-codes: D61 H21 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-mic and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0501

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