Price Elasticity Of Market Demand Research Articles

Optimal completeness of property rights on renewable resources in the presence of market power

There are many instances where property rights are imperfectly defined, incomplete, or imperfectly enforced. The purpose of this normative paper is to address the following question: are there conditions under which partial property rights are economically efficient in a renewable resource economy? To address this question, we treat the level of completeness of property rights as a continuous variable in a renewable resource economy. By design, property rights restrict access to the resource, so they may allow a limited number of firms to exercise market power. We show that there exists a level of property rights completeness that leads to first-best resource exploitation; this level is different from either absent or complete property rights. Complete rights are neither necessary nor sufficient for efficiency in the presence of market power. We derive an analytic expression for the optimal level of property rights completeness and discuss its policy relevance and information requirements. The optimal level depends on (i) the number of firms, (ii) the elasticity of input productivity, and (iii) the price elasticity of market demand. We also find that a greater difference between the respective values of input and output requires stronger property rights. In fact, high profits imply both a severe potential commons problem and may be the expression of market power; strong property rights limit the commons problem; and their incompleteness offsets market power. Biology also impacts the optimal quality of property rights: when the stock of a resource is more sensitive to harvesting efforts, optimal property rights need to be more complete.

Income inequality and price elasticity of market demand: the case of crossing Lorenz curves

This paper extends Ibragimov and Ibragimov (Econ Theory 32:579–587, 2007) in which the effect of changes income inequality on the price elasticity of market demand is characterized for the class of income distribution changes occurring through non-intersecting Lorenz curve shifts. We derive sufficient conditions for increase/decrease in price elasticity of market demand, under general changes in income distribution, allowing Lorenz curves to intersect as they shift. We conclude by drawing out implications of different types of tax policy changes for demand elasticity.

Can Health Spending Be Reined in Through Supply Constraints? An Evaluation of Certificate-of-Need Laws

For 50 years, US policymakers and economists have searched for ways to slow the growth of spending on health care. One approach currently taken by 35 states is to restrict the supply of health care by requiringnew and growing providers to show that they serve an “economic need.” Hospitals and certain other health providers must obtain a certificate of need (CON) from a state board before opening or expanding. I show that in a simple model where CON restricts supply, the effect of CON on spending depends on the price elasticity of market demand for health care. CON will work to restrain spending when demand is elastic; however, most estimates show the demand for health care to be quite inelastic. I therefore predict that CON willincrease prices for health care without much reducing its use, leading to an increase in spending. Using data from the National Health Expenditure Accounts, I estimate that CON laws do not reduce spending by any major payer or for any major type of provider and that they increase spending on some types of health care.

Residential Water Use: Efficiency, Affordability, and Price Elasticity

In practice, water pricing is the main economic instrument used to discourage the wasteful use of residential water. Owing to considerations of affordability, residential water is systematically underpriced because water is essential for life. Such a low price results in water being used inefficiently. This paper proposes a system that supplements the existing price system with a cap-and-trade measure to reconcile conflicts among the goals of residential water use. It forces all people (independent of income) to be faced with reasonable price signals and to use water efficiently. The poor could, however, gain from trade and afford water. By taking advantage of the agent-based model, a simulation of this system applied to Taipei, Taiwan shows that those with lower income per capita are better off under this system even though the equilibrium price of residential water is higher. The simulated average price elasticity of market demand is −0.449.

Market Substitution and the Pareto Dominance of Ad Valorem Taxation

1. IntroductionExcise taxes take two basic forms: unit taxes based on quantity sold and ad valorem taxes based on sales value. While these two versions of excise taxes are equivalent in perfectly competitive markets,1 in noncompetitive markets ad valorem taxation has been shown to welfare dominate unit taxation.2Ad valorem taxation also Pareto dominates unit taxation in monopoly and, in some cases, oligopoly markets, in the sense that, under an isorevenue constraint, replacing unit taxation with ad valorem taxation increases both consumer welfare and producer profits (Skeath and Trandel 1994).3In this paper, we depart from the homogeneous product oligopoly markets assumed in previous literature by adopting a model of heterogeneous products developed by Dixit and Stiglitz (1977). First, we study the Pareto dominance of ad valorem taxation in short-run equilibrium, where a fixed number of firms produce imperfectly substitutable goods and engage in Bertrand competition. We define market demand as a weighted sum of firm quantities demanded and market price as a similarly weighted average of firm prices. By assuming that market demand is isoelastic with respect to market price, our framework allows the elasticity of substitution among the goods in the taxed market and the price elasticity of market demand to bear on the comparison of the two forms of excise taxes.We find that, in the short run, ad valorem taxation always dominates unit taxation both in terms of consumer welfare and overall welfare (the precise meaning of overall welfare is made clear later). However, Pareto dominance of ad valorem taxation never exists if market demand is inelastic because, in this case, firms always earn lower profits under ad valorem taxation. Restricting our analysis to the case where market demand is elastic, we find that ad valorem taxation Pareto dominance is more likely the smaller the within-market elasticity of substitution or the larger the market demand elasticity. We also generalize a prior result for homogenous products: Increasing the number of firms in a market decreases the likelihood of ad valorem taxation Pareto dominance. Finally, we find that for a sufficiently large within-market elasticity of substitution, ad valorem taxation Pareto dominance is more likely the smaller the tax level, contrary to an existing result for the homogenous product case.Given the results of previous literature that unit taxation tends to be welfare dominated by equal-revenue ad valorem taxation in noncompetitive environments, the existence of both types of taxes must be explained by nonoptimal behavior on the part of government.4 One possible explanation for the coexistence of unit and ad valorem taxes, despite the welfare dominance of ad valorem taxation, is that a government only cares about the amount of revenue collected from each market, and the choice between these two taxes in a specific market is dictated by producers' interests, which are more concentrated than consumers' interests in general. Given this hypothesis concerning the political economy of choice between the two major forms of excise taxes, the results of this paper make testable predictions with respect to how the relative desirability of ad valorem taxation (from the perspective of producers) changes with several important characteristics of a market: the elasticity of substitution among goods in the market, the market demand elasticity, the number of firms in the market, and the level of taxation in the market.Extending our analysis to long-run equilibrium, where entry and exit provides an additional market equilibrating mechanism and where firms always earn zero profits, we show that an equal-revenue switch from unit to ad valorem taxation has welfare effects on consumers through two channels. …

Income Distribution, Price Elasticity and the ‘Robinson Effect’

In The Economics of Imperfect Competition, Joan Robinson argued that an increase of the consumers’ incomes should make demand less elastic—which, although reasonable about individual demand as an assumption on preferences, suggests a role for income distribution as far as market demand is concerned. We use Esteban's (International Economic Review, Vol. 27 (1986), No. 2, pp. 439–444) income share elasticity to provide sufficient conditions on income distribution that support the ‘Robinson effect’—i.e. such that a negative (positive) relationship between individual income and price elasticity translates into a negative (positive) relationship between mean income and market demand elasticity. The paper also provides a framework to study the effects of distributive shocks on the price elasticity of market demand.

Income Distribution, Price Elasticity, and the 'Robinson Effect'

In The Economics of Imperfect Competition, Joan Robinson argued that an increase of the consumers' incomes should make demand less elastic - which, though reasonable about individual demand as an assumption on preferences, suggests a role for income distribution as far as market demand is concerned. We model increases in aggregate income as first-order stochastic dominance shifts of the income distribution, and use Esteban's (1986) income share elasticity to provide sufficient conditions on income distribution that support the 'Robinson effect' - i.e., such that a negative (positive) relationship between indivual income and price elasticity translates into a negative (positive) relationship between mean income and market demand elasticity. The paper also provides a framework to study the effects of distributive shocks on the price elasticity of market demand.

Analysis of Room Taxes Levied on the Lodging Industry

This article summarizes a study of the impacts of room taxes on the lodging industry by (1) reporting on the findings of Phase II of an overall study assessing the negative impacts on number of rooms rented of room taxes levied on the lodging industry, and (2) applying the price elasticity of market demand found in step 1 to the average amounts of room taxes paid, as measured in Phase I of the overall study. The elasticity measurement comes from a statistical model based on data from a national probability survey of the properties owned by members of the American Hotel and Motel Association taken in spring 1990.

Harvest uncertainty and the tragedy of the commons

This paper demonstrates that a fixed number of risk-averse firms faced with harvest uncertainty owing to resource stock uncertainty will typically reduce their exploitation of a commons. In addition, the total exploitation of the industry will decrease when entry is permitted and uncertainty is compared with certainty. This result holds for perfectly competitive output markets and also characterizes imperfectly competitive output markets with linear market demand and risk-neutral firms. In the latter case, the socially optimum number of firms is determined based upon the degree of uncertainty, the price elasticity of market demand, and the elasticity of input productivity.

Expectations, the commons, and optimal group size

This article derives a formula for the optimal number of exploiters of a commons, whose output is sold in an imperfectly competitive market and whose exploiters hold nonzero or non-Nash conjectures. We express the optimal number of exploiters in terms of the conjecture, the elasticity of input productivity, and the price elasticity of market demand. Consistent conjectures—those that agree with reality—imply the full tragedy of the commons and zero profits for the exploiters.

The Commons and the Optimal Number of Firms

The problem of the is a frequently cited example of market failure in which exploiters' pursuit of profits does not lead to the attainment of a social or Pareto optimum. In particular, a free-access equilibrium induces an unrestricted number of exploiters or firms to equate the variable input's average product, instead of its marginal product, to the input's real rental rate; hence, the rents of the variable input are driven to zero [Haveman, 1973].1 When the number of firms in a commons is unrestricted, the scarce factor (e.g., the fishery, the hunting ground) is not imputed a rent. A social optimum can be achieved if a single firm exploits a commons and sells its output in a perfectly competitive market [Weitzman, 1974]. The purpose of this note is to derive an expression for the optimal number of firms exploiting a commons when the resulting output is sold in an imperfectly competitive market.2 Since demand inelasticity due to monopoly power leads to overconservation, while an increase in the number of exploiting firms typically leads to underconservation, a finite number of firms for a commons can be found corresponding to a social or Pareto optimum. In particular, the optimum number of firms depends directly on the elasticity of the input productivity and inversely on the price elasticity of market demand.

Price, Quality, and Market Share

To understand the behavior of firms and to assess the degree of competition among firms, we need information on the demand function faced by the firm. Despite this, little published work has been forthcoming on the demand for branded goods and two obvious explanations come to mind: the problem of quality variation among brands of the same commodity and the lack of data on market-share behavior. This contribution is largely concerned with developing an operational version of a demand-forbrand model in which quality variation is explicitly recognized. This is accomplished by following up a suggestion made by Griliches (1961) and generating implicit prices for the range of qualitative attributes a commodity possesses. This allows us to construct quality-adjusted prices for each brand which are the correctly specified prices for the demand equation. The model is tested out in the U.K. market for farm tractors and found to give satisfactory results.