Preferences, Welfare and Desirable Subsidies Under Monopolistic Competition

16 Pages Posted: 30 Sep 2013

Date Written: November 2013

Abstract

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 Pareto 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.

Suggested Citation

Kwan, Chang Yee, Preferences, Welfare and Desirable Subsidies Under Monopolistic Competition (November 2013). Metroeconomica, Vol. 64, Issue 4, pp. 744-759, 2013. Available at SSRN: https://ssrn.com/abstract=2332953 or http://dx.doi.org/10.1111/meca.12027

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