Shadow Prices for a Nonconvex Public Technology
in the Presence of Private Constant Returns
Working Paper No. 05-W01
John A. Weymark
ABSTRACT [article]
Diamond and Mirrlees have shown that public sector shadow prices should be set equal to the private producer prices in some circumstances
even if taxes are not optimal when the public production technology is
convex and some of the private sector firms have constant-returns-to-scale
technologies. In this article, it is shown that the optimal public
production plan maximizes profits using the private producer prices on a
subset of the public production set if this set is nonconvex. Sufficient
conditions for profit maximization using these prices to identify the
optimal public production plan on the whole public production set are also
identified.
Keywords and Phrases: shadow prices, public sector pricing, Diamond and Mirrlees
JEL Classification Number: D61, H21