American Economic Review: Vol. 103 No. 6 (October 2013)


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Surplus Maximization and Optimality

Article Citation

Schlee, Edward E. 2013. "Surplus Maximization and Optimality." American Economic Review, 103(6): 2585-2611.

DOI: 10.1257/aer.103.6.2585


Expected consumer's surplus rarely represents preferences over price lotteries. Still, I give sufficient conditions for policies which maximize aggregate expected surplus to be interim Pareto Optimal. Besides two standard partial equilibrium conditions, I assume that feasible prices satisfy a single-crossing property; and each consumer's indirect utility satisfies increasing differences in the price and income. I use the result to extend well-known welfare conclusions beyond the knife-edge quasilinear utility case. Since increasing differences puts no upper bound on risk aversion, the result is useful for applications in which risk aversion is important.

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Schlee, Edward E. (AZ State U)

JEL Classifications

D11: Consumer Economics: Theory
D24: Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
D42: Market Structure and Pricing: Monopoly
D81: Criteria for Decision-Making under Risk and Uncertainty
D83: Search; Learning; Information and Knowledge; Communication; Belief
L42: Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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