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Public Sector Rationining and Private Sector Selection

Research output: Contribution to journalArticle

Simona Grassi, Ching to Albert Ma

Original languageEnglish
Pages (from-to)1-34
Number of pages34
JournalJournal of Public Economic Theory
Volume14
Issue number1
Publication statusPublished - 2012

King's Authors

Abstract

We study the interaction between nonprice public rationing and prices in the private market. Under a limited budget, the public supplier uses a rationing policy. A private firm may supply the good to those consumers who are rationed by the public system. Consumers have different amounts of wealth, and costs of providing the good to them vary. We consider two regimes. First, the public supplier observes consumers’ wealth information; second, the public supplier observes both wealth and cost information. The public sup- plier chooses a rationing policy, and, simultaneously, the private firm, observing only cost but not wealth information, chooses a pricing policy. In the first regime, there is a continuum of equilibria. The Pareto dominant equilibrium is a means-test equilibrium: poor consumers are supplied while rich consumers are rationed. Prices in the private market increase with the budget. In the second regime, there is a unique equilibrium. This exhibits a cost-effectiveness rationing rule; consumers are supplied if and only if their cost–benefit ratios are low. Prices in the private market do not change with the budget. Equilibrium consumer utility is higher in the cost-effectiveness equilibrium than the means- test equilibrium.

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