Reassessing the Diamond/Mirrlees Efficiency Theorem

Peter Hammond

Working Papers from Stanford University, Department of Economics

Abstract: March 2000

Diamond and Mirrlees (1971) provide sufficient conditions for a second-best Pareto efficient allocation with linear commodity taxation to require efficient production when a finite set of consumers have continuous single-valued demand functions. This paper considers a continuum economy allowing indivisible goods, other individual non-convexities, and some forms of non-linear pricing for consumers. Provided consumers have appropriately monotone preferences and dispersed characteristics, robust sufficient conditions ensure that a strictly Pareto superior incentive compatible allocation with efficient production results when a suitable expansion of each consumer's budget constraint accompanies any reform which enhances production efficiency. Appropriate cost-benefit tests can identify small efficiency enhancing projects.

Date: 2000-03
New Economics Papers: this item is included in nep-cdm, nep-ind and nep-mic
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Citations: View citations in EconPapers (3)

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