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Essays on second-best economic policymaking with price makers

University of British Columbia

The first essay of this dissertation analyzes the claim that a Marshallian total surplus optimum characterizes a second-best Pareto optimum in a general equilibrium model with price makers. The main result of this essay is that a Marshallian total surplus optimum corresponds to a second-best Pareto optimum when (i) the consumer's preferences are quasi-linear with respect to a numeraire, and (ii) for all other markets except the one under consideration, first-best (or Paretian) optimality conditions are satisfied. The second essay characterizes the optimal regulatory policy for point-source pollution emissions when firms are competing in Cournot fashion in the product market and have private information about their own cost. It is shown that the optimal regulatory policy benefits from the strategic interaction between the firms in the output market even though the firms' private information is uncorrelated. The firms strategic interaction in the output market acts as an information correlation externality that mitigates the wellknown "rent-extraction efficiency" trade-off. Each firms' opportunity to over-report their costs is reduced because the output market's strategic interaction reduces the profitability of infra-marginal units if they do. The main result shows that optimal environmental regulations discriminate between firms of given industry. Moreover, it is shown that if the regulator believes that firm A is always more likely to be efficient than firm B (in the sense of first-order stochastic dominance) and that both firms are equally efficient ex post, then firm A faces a higher marginal tax than its competitor. In light of this result, it is argued that the model provides theoretical foundations for grandfather clauses in environmental regulations.

Thesis/Dissertation

application/pdf

2009-07-20

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http://hdl.handle.net/2429/11066

Economics

University of British Columbia

UBCV

DSpace