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Optimal public rationing : price response and cost effectiveness
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1830-7728
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EUI MWP; 2009/30
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GRASSI, Simona, MA, Ching-to Albert, Optimal public rationing : price response and cost effectiveness, EUI MWP, 2009/30 - https://hdl.handle.net/1814/12237
Abstract
We study optimal public rationing of an indivisible good and private sector price response. Consumers
differ in their wealth and cost of provisions. Due to a limited budget, some consumers must be
rationed. Public rationing determines the characteristics of consumers who seek supply from the
private sector, where a firm sets prices based on consumer cost information and in response to the
rationing rule. We consider two inforrmation regimes. In the first, the public supplier rations
consumers according to their wealth information. In equilibrium, the public supplier must ration both
rich and poor consumers. Supplying all poor consumers would leave only rich consumers in the
private market, and the firm would react by setting a high price. Rationing some poor consumers is
optimal, and implements price reduction in the private market. In the second information regime, the
public supplier rations consumes according to consumer wealth and cost information. In equilibrium,
rationing is based on cost-effectiveness and consumers are allocated the good if and only if their costs
are below a threshold.