Welfare Economics and Second-Best Theory by Richard S. Markovits

Author:Richard S. Markovits
Language: eng
Format: epub
ISBN: 9783030433604
Publisher: Springer International Publishing

Diagram 7.2 contains six curves. The first is a DDG = MLVG curve for the good G to whose production process the relevant PPR project relates. The labeling of the MLVG curve is actually misleading: the MLVG curve that Diagram 7.2 contains is actually the MLVG curve that would be operative if the unrealistic step-wise-monopoly-analysis practice of ignoring the distorting effects of all exemplars of all types of Pareto imperfections other than imperfections in seller price-competition made no difference. The fact that DDG= MLVG is constructed to be convex to the origin plays no role in the analysis that follows.

The second curve in Diagram 7.2 is MRG. It is constructed on the assumption that G is sold at a single per-unit price that applies to all units of the product and all potential buyers of the product. This single-pricing assumption does affect the quantitative conclusion the following analysis reaches because it guarantees that the use of any marginal-cost-reducing production process a relevant PPR project discoveries will yield a negative (SW[M]) distortion in PB(U)PPR by increasing the amount of buyer surplus generated by the sale of G.

The third and fourth curves in Diagram 7.2 are the MCG/o and MCG/n curves. These curves indicate the marginal cost of producing successive units of G using, respectively, (1) the new (hence subscript “n”) production process the PPR project in question (did discover)/(would have discovered) and (2) the old (hence subscript “o”) production process that (presumably) was/(would be) replaced by the new production process that the PPR project in question (did discover)/(would have discovered). MCG/n is lower than MCG/o in Diagram 7.2 (FO < CO) because the analysis that Diagram 7.2 illustrates assumes (as I believe is typically the case) that the use of the new production process will reduce the marginal cost of producing G.11

The fifth and sixth curves in Diagram 7.2—MLCG/n and MLCG/o—indicate the marginal allocative cost of producing successive units of G using, respectively, the new production process that the PPR project in question (did discover)/(would have discovered) and the old production process that the new production process (did replace)/(would have replaced)—more precisely, the MLCG/n and MLCG/o curves that would be operative if the step-wise imperfections-in-seller-price-competition distortion-analysis protocol of ignoring the distorting effects of all exemplars of all types of Pareto imperfection other than imperfections in seller price-competition would not affect the relationship between MLCG/n and MLCG/o. Diagram 7.2 constructs its MLCG/n curve below its MLCG/o curve on the assumption that the relevant imperfections in seller price-competition would generate negative (SW[M]) distortions in both the private marginal cost of producing each unit of the output of G that would be produced if the old production process were used (output OT—the output at which MRG/o cuts MCG/o from above at point D) and the extra units of G that the use of the new production process would make it profitable for the producer of G to produce (TU where OU is the output at which MRG cuts MCG/n from above at point K). In Diagram 7.2,

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