Welfare maximization, pricing, and allocation with a product performance or environmental quality standard: Illustration for the gasoline and additives market

Paul W. Gallagher, Hosein Shapouri and Jeffrey Price

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Programming models approximate market prices and quantities when regulations constrain firm choices, because market outcomes result when welfare is appropriately defined and includes performance and environmental constraints. This study discusses market operation in quality-constrained sectors, like gasoline and additives; processors expand output until marginal processing cost equals the processing margin between product revenues and raw material costs; retailers who buy gasoline and additives from processors and sell blended retail gasoline price sales at a marginal cost that includes the blended input value plus adjustments for values of constrained attributes; and market supplies and demands of measurable attributes like octane are balanced. This method can enhance predictions about the effects of new policies that regulate product quality. Analysis can now include price and output adjustment in factor and product markets, and the competitiveness of new processes and products.

Date: 2006-06-01
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