Existence, Local Uniqueness, and Optimality of a Marginal Cost Pricing Equilibrium in an Economy with Increasing Returns

Abstract

This paper proposes a notion of equilibrium for an economy with increasing returns to scale and gives sufficient conditions for its existence and local uniqueness. The optimality properties of this equilibrium notion follows from our previous investigations on economies with increasing returns. The notion of equilibrium used in this paper, i.e. a marginal cost pricing equilibrium, is a family of consumption plans, production plans, prices and lump sum taxes such that: all the first order conditions are satisfied in equilibrium; the lump sum taxes cover the aggregate losses of firms with increasing returns to scale; all markets for goods and services clear. The intended model is an economy with a regulated natural monopoly and a large number of unregulated competitive firms.