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Regular version of the site

Article

On The Social Efficiency in Monopolistic Competition Models

HSE Economic Journal. 2015. Vol. 19. No. 3. P. 386-394.
Radionov S., Pospelov I. G.

We consider standard monopolistic competition models in the spirit of Dixit
and Stiglitz or Melitz with aggregate consumer's preferences defined by two well-
known classes of utility functions – the implicitly defined Kimball utility function
and the variable elasticity of substitution utility function. These two classes gene-
ralize classical constant elasticity of substitution utility function and overcome its
lack of flexibility. It is shown in [Dhingra, Morrow, 2012] that for the monopolis-
tic competition model with aggregate consumer’s preferences defined by the va-
riable elasticity of substitution utility function the laissez-faire equilibrium is effi-
cient (i.e. coincides with social welfare state) only for the special case of constant
elasticity of substitution utility function. We prove that the constant elasticity of
substitution utility function is also the only one which leads to efficient laissez-
faire equilibrium in the monopolistic competition model with aggregate consu-
mer’s preferences defined by the utility function from the Kimball class. Our main
result is following: we find that in both cases a special tax on firms' output may be
introduced such that market equilibrium becomes socially efficient. In both cases
this tax is calculated up to an arbitrary constant, and some considerations about
the «most reasonable» value of this constant are presented.