Quasilinearity and Its Discontents: Public-Good Regulation with Consumer Risk Aversion and Income Effects

Edward E. Schlee

AEA Papers and Proceedings, 2026, vol. 116, 532-537

Abstract: In the partial-equilibrium literature on regulation, the usual measure of social welfare is a weighted average of expected profit and expected consumers' surplus. It is justified if two strong quasilinearity assumptions hold on each consumer's von Neumann–Morgenstern utility: income-risk neutrality and no income effects, assumptions that rule out matters of first-order importance for regulation under uncertainty. I review and extend known results on how risk aversion and income effects change Weitzman’s classic result on prices versus quantities. And I present preliminary results on an optimal regulatory policy for risk-averse consumers, unconstrained to just prices or quantities.

JEL-codes: D12 D81 D91 H41 Q54 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/pandp.20261065

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