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Microeconomics of Market Failures / Edition 1

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Overview

In this book Bernard Salanié studies situations where competitive markets fail to achieve a collective optimum and the interventions used to remedy these so-called market failures. He includes discussions of theories of collective decision making, as well as elementary models of public economics and industrial organization. Although public economics is traditionally defined as the positive and normative study of government action over the economy, Salanié confines himself to microeconomic aspects of welfare economics; he considers taxation and the effects of public spending only as potential remedies for market failures. He concludes with a discussion of the theory of general equilibrium in incomplete markets.

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Product Details

  • ISBN-13: 9780262194433
  • Publisher: MIT Press
  • Publication date: 10/16/2000
  • Edition description: New Edition
  • Edition number: 1
  • Pages: 238
  • Sales rank: 1,268,472
  • Product dimensions: 7.00 (w) x 9.00 (h) x 1.18 (d)

Meet the Author

Bernard Salanié is Professor of Economics at Columbia University. Formerly Director of CREST (Paris), he has taught at Ecole Polytechnique, Stanford University, the University of Chicago, and the Toulouse School of Economics. Salanié is the author of Microeconomics of Market Failures (2000) and The Economics of Contracts: A Primer (second edition, 2005), both published by the MIT Press.

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Table of Contents

1 Introduction 1
1.1 The Fundamental Theorems 1
1.1.1 The Pareto Optimum 2
1.1.2 General Equilibrium 2
1.1.3 The Two Fundamental Welfare Theorems 3
1.2 Return to the Hypotheses 6
1.3 The Government's Role 8
Bibliography 10
I Collective Choice 11
2 The Aggregation of Preferences 13
2.1 Arrow's Theorem 17
2.2 Noncomparable Cardinal Preferences 22
2.3 Comparable Ordinal Preferences 23
2.4 Comparable Cardinal Preferences 24
2.5 Conclusion 25
2.6 Appendix A: Proof of Arrow's Theorem 26
2.7 Appendix B: Theories of Justice 27
2.7.1 Utilitarianism 28
2.7.2 Rawls's Difference Principle 29
2.7.3 Recent Developments 31
2.7.4 Nozick's Historical Approach 33
2.7.5 Conclusion 34
Bibliography 35
3 Cost-Benefit Analysis 37
3.1 Measures of Welfare 37
3.2 First-Best 42
3.3 Second-Best 44
3.3.1 Shadow Prices 44
3.3.2 Nonmarket Goods 45
3.3.3 Incomplete Markets 46
Bibliography 46
4 Implementation 49
4.1 Dominant Strategy Equilibrium 50
4.2 Nash Equilibrium 52
4.3 Refinements of the Nash Equilibrium 57
4.4 Bayesian Equilibrium 58
4.5 Appendix A: Proof of the Gibbard-Satterthwaite Theorem 59
4.6 Appendix B: Proof of Maskin's Theorem 63
Bibliography 65
II Public Economics 67
5 Public Goods 69
5.1 The Optimality Condition 70
5.2 Implementing the Optimum 72
5.2.1 The Subscription Equilibrium 73
5.2.2 Voting Equilibrium 73
5.2.3 The Lindahl Equilibrium 74
5.2.4 Personalized Taxation 75
5.2.5 A Planning Procedure 76
5.2.6 The Pivot Mechanism 78
5.3 The Property of Public Goods 83
5.4 The Importance of the Free-Rider Problem 85
5.5 Local Public Goods 86
5.6 Appendix: Characterization of VCG Mechanisms 86
Bibliography 88
6 External Effects 89
6.1 The Pareto Optimum 90
6.2 Implementing the Optimum 92
6.2.1 The Competitive Equilibrium 92
6.2.2 Quotas 94
6.2.3 Subsidies for Depollution 94
6.2.4 The Rights to Pollute 95
6.2.5 Taxation 97
6.2.6 The Integration of Firms 97
6.2.7 A Compensation Mechanism 98
6.3 Must Prices or Quantities Be Regulated? 100
6.4 Coase's Theorem 102
Bibliography 104
7 Nonconvexities 107
7.1 Consequences of Nonconvexities 107
7.1.1 Nonconvex Preferences 107
7.1.2 Nonconvex Sets of Production 109
7.2 Convexification by Numbers 112
7.3 Regulation of Natural Monopolies 113
7.3.1 Marginal Cost Pricing 116
7.3.2 Second-Best Pricing of Regulated Firms 117
7.4 Deregulation 124
Bibliography 125
III Industrial Organization 127
8 General Equilibrium of Imperfect Competition 131
8.1 Three Difficulties 131
8.1.1 The Firms' Objectives 132
8.1.2 Price Normalization 133
8.1.3 The Quasi-concavity of Profit 133
8.2 Subjective Demand Equilibrium 134
8.3 Objective Demand Equilibrium 135
8.3.1 Equilibrium in Quantities 135
8.3.2 Equilibrium in Prices 136
8.4 Conclusion 137
Bibliography 138
9 Prices and Quantities 141
9.1 Monopoly 141
9.1.1 Social Distortion 143
9.1.2 How to Avoid Distortions 144
9.1.3 The Case of Durable Goods 146
9.2 Price Discrimination 148
9.2.1 First Degree 148
9.2.2 Second Degree 148
9.2.3 Third Degree 150
9.3 Oligopoly 150
9.3.1 Cournot's Oligopoly 151
9.3.2 The Bertrand Equilibrium 152
9.3.3 Sketches of Resolutions of the Paradox 153
9.3.4 Strategic Substitutes and Complements 157
Bibliography 158
10 Product Choice 161
10.1 Definitions 161
10.1.1 A Model of Vertical Differentiation 162
10.1.2 A Model of Horizontal Differentiation 162
10.2 Differentiation and Monopoly 163
10.2.1 Optimal Quality Choice 163
10.2.2 Nonobservable Quality 165
10.2.3 Choice of Number of Products to Introduce 166
10.3 Differentiation and Oligopoly 167
10.3.1 The Maximal Differentiation Principle 167
10.3.2 Entry and Number of Products 170
Bibliography 177
11 Long-Term Entry and Competition 179
11.1 Sustainability and Contestability 179
11.2 Preemption 183
11.3 Limit Price and Predation 186
11.3.1 Limit Price 186
11.3.2 Predation 187
11.4 Research and Development 188
Bibliography 191
12 Vertical Relations 193
12.1 Double Marginalization 194
12.2 Justifications of Vertical Constraints 197
12.2.1 Retailer Effort Incentive 197
12.2.2 Price Discrimination 198
12.2.3 Tied Sales 198
12.2.4 Reduction of Price Competition 199
12.3 Comparison of Different Practices 199
12.4 Elements of Law 201
Bibliography 202
IV Incomplete Markets 203
13 Elements of the Theory of Incomplete Markets 205
13.1 The General Framework 205
13.2 Existence of Equilibrium 210
13.3 Inefficiency of Equilibrium 211
13.4 Equilibria with Production 213
13.5 Application to International Trade 215
13.6 Conclusion 216
13.7 Appendix: Nominal Assets 216
Bibliography 218
Index 221
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