Pricing Underemployed Capacity in a Linear Economic Model.
STANFORD UNIV CALIF SYSTEMS OPTIMIZATION LAB
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One of the difficulties in relating the shadow prices of a linear economic model to their counterparts in the real economy being modelled is the assumption of perfect competition. Under this assumption competition would force the price of any resource in excess supply down to zero. In real economies, however, owners of capacity routinely receive a return even when that capacity is underemployed, precisely because competition is imperfect. We present a method for determining a stable system of shadow prices consistent with an absence of competition among the owners of slack capacity and show that this implies non-zero prices on all resources, regardless of excess supply. Author
- Economics and Cost Analysis