PRICES, PROFITS AND RESOURCE MOBILISATION IN A CAPACITY CONSTRAINED MIXED ECONOMY

V. Pandit and B. Mukherji
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V. Pandit: Delhi School of Economics
B. Mukherji: Delhi School of Economics

No 48, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: A mixed economy is one in which the state is actively engaged in many production sectors. Profits of these state owned firms, if any, go into the Revenue side of the state budget. In a general equilibrium model with demand feedback from the households and a Leontief type production system, we study situations of capacity constraints and rationing. A strong condition emerges as necessary and sufficient to provide nonnegative prices. We call it the solvency condition. If requires the value of all sales by the state to the private producing sector plus its budgetary deficit to strictly exceed the value of its purchases from the private sector. But even a positive product price (for the state sector) does not necessarily imply positive profits without further and more restrictive conditions. Finally, in a model of subsidized rationing (at below market clearing price) by the state of its own products we establish that the profits of the state sector are bounded above and of the private sector bounded below. This too would be important in understanding the inner dynamics of a mixed economy

Pages: 24 pages
Date: 1997-08
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