Chapter

Conventional Shadow Prices

Chris Jones

in Applied Welfare Economics

Published in print May 2005 | ISBN: 9780199281978
Published online July 2005 | e-ISBN: 9780191602535 | DOI: http://dx.doi.org/10.1093/0199281971.003.0002
Conventional Shadow Prices

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The formal analysis in this chapter lays the foundation for the welfare analysis in the remainder of the book. A conventional welfare equation for marginal policy changes is obtained in a competitive general equilibrium model of a tax-distorted closed economy. Initially, the distributional effects are removed by adopting the ‘dollar-is-a-dollar’ assumption used by Harberger. The analysis is extended in the following chapters to include distributional effects, time, internationally traded goods, externalities, non-competitive behaviour, price-quantity controls, public goods, and other market distortions. The Hatta decomposition is generalized to show that the shadow prices of goods are equal to their compensated shadow prices multiplied by the shadow value of government revenue. Any income effects are isolated in the shadow value of government revenue.

Keywords: conventional welfare analysis; efficiency effects; Hatta decomposition; income effects; lump sum transfers; shadow prices; shadow value of government revenue

Chapter.  12031 words.  Illustrated.

Subjects: Public Economics

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