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Preferences, Welfare and Desirable Subsidies under Monopolistic Competition
Author(s) -
Kwan Chang Yee
Publication year - 2013
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12027
Subject(s) - subsidy , monopolistic competition , economics , welfare , microeconomics , competition (biology) , public economics , diversity (politics) , preference , monopoly , market economy , ecology , biology , sociology , anthropology
A simple model of monopolistic competition with consumer preferences for diversity reconciles an empirical‐theoretical disconnect of the welfare properties of industrial subsidies. The optimal policy rules indicate that subsidies can be P areto improving, but subject to society's preference for diversity. More counter‐intuitively, the welfare‐maximizing subsidy is always found to be strictly non‐negative, and the general qualitative nature of the results seem to contradict the optimum taxation literature. The subsidy incidence is also examined and we find that there exists a potential for an over‐shifting of the subsidy.