Welfare‐maximising Pricing in a Macroeconomic Model With Imperfect Competition and Consumption Externalities

Abstract

This paper develops a simple macroeconomic model with imperfect competition and consumption externalities, and uses it to examine whether the marginal cost pricing rule in the partial equilibrium framework can apply to the general equilibrium framework. It is shown that, for welfare to be maximised, average revenue should be set equal to marginal cost if consumption externalities are either absent or positive. However, for welfare to be maximised, average revenue should be set higher than marginal cost in the presence of negative consumption externalities. Copyright 2010 The Authors. Australian Economic Papers 2010 Blackwell Publishing Ltd/University of Adelaide and Flinders University .