Accessible Pareto-Improvements: Using Market Information to Reform Inefficiencies
We study Pareto improvements whose implementation requires knowledge of only market prices and traded quantities, not utility and demand functions. Quantity stabilization gives agents the right to repeat the net trades they previously conducted, but requires policymakers to have records of those trades. While reasonable in some partial equilibrium contexts, such an assumption is implausible in general equilibrium. To diminish informational requirements further, we also consider price stabilization, which holds constant the relative prices that consumers face. Although price stabilizations do not achieve ﬁrst-best eﬀiciency, they lead to Pareto-improvements and production eﬀiciency. Moreover, the production eﬀiciency advantage persists under price stabilization but not under quantity stabilization when some ﬁrms are not proﬁt-maximizers; this diﬀerence can be critical in transition policies for planned economies. In addition to planning, we consider several other applications of quantity and price stabilization, both partial equilibrium and general equilibrium: removal of rent controls, deregulation of a cross-subsidizing public utility, and the entry of an autarkic economy into world trade.
Mandler, Michael, "Accessible Pareto-Improvements: Using Market Information to Reform Inefficiencies" (2001). Cowles Foundation Discussion Papers. 1582.