TAX POLICY AND CONSUMER FORESIGHT: A GENERAL EQUILIBRIUM SIMULATION STUDY

This paper presents a dynamic computational general equilibrium model in which expectations regarding future prices can be varied systematically. The model is employed to evaluate how expectations influence the effect of long-run tax policy changes. Under policies (like a consumption tax) that reduce rates of return over time, individuals with perfect foresight save less than individuals with myopic beliefs. This is because consumers with foresight are better able to anticipate the lower returns. Lower saving means that existing distortions due to capital taxes are not offset as much, so that welfare gains are smaller under perfect foresight.     

Message and price components of Family Caps: experimental evidence from New Jersey

In this paper, we examine the relative efficacy of two mechanisms--price consideration and the message of social responsibility--in accounting for Family Cap effects on fertility behavior. The Family Cap is a component of welfare reform policy that denies additional cash benefits to children born 10 or more months after a woman entered the welfare rolls. We use data from the New Jersey Family Development Program (FDP) evaluation that employed a classical experimental design. We find that fertility behaviors are influenced by both Family Cap price and message mechanisms but that these effects are conditioned by welfare recipients' time on welfare and race. Black women who have longer stays on welfare are more likely to be influenced by price while women with shorter stays are influenced by both price and the social message. We believe our results have implications not only for future public welfare policy initiatives but for any social policies that attempt to influence behavior directly, through individual rewards and punishments, and indirectly through the activation of social or community pressures.     

Bargaining power and equilibrium consumption

We examine how a shift of bargaining power within households operating in a competitive market environment affects equilibrium allocation and welfare. If price effects are sufficiently small, then typically an individual benefits from an increase of bargaining power, necessarily to the detriment of others. If price effects are drastic, the welfare of all household members moves in the same direction when bargaining power shifts, at the expense (or for the benefit) of outside consumers. Typically a shift of bargaining power within a set of households also impacts upon other households. We show that each individual of a sociological group tends to benefit, if he can increase his bargaining power, but suffers if others in his group do the same.     

THE WELFARE COST OF THE UNDERGROUND ECONOMY

This paper estimates the welfare cost of taxes that create an incentive for resources to flow to the underground, or untaxed, sector in the United States. Using a general equilibrium model of the American economy, the welfare cost is found to be large and growing in absolute and relative terms over time. In 1980 the welfare cost may be as much as $220 billion, or over 9 percent of output; even conservative estimates place the loss at nearly $100 billion. It also is found that small reductions in tax rates substantially reduce the welfare cost.     

INTERNATIONAL NARCOTICS TRADE,FOREIGN AID,AND ENFORCEMENT

Using a general equilibrium model of a developing narcotics‐producing and ‐exporting economy, we analyze the economic effects of policies designed to restrict the production and trade of narcotics: foreign aid tied to anti‐narcotics law enforcement activities, demand reduction policies, and alternative development policies. We characterize the problem as one of serious factor market distortions introduced by illicit production and enforcement. While aid to enforcement generally reduces the production and export of narcotics, it is less effective for economies with market power, and under plausible conditions may raise narcotics output and have negative welfare implications for the recipient. (JEL F1)     

DISCOUNT PRICING

We investigate the practice of framing a price as a discount from an earlier price, with information such as “was $200, now $100.” We discuss two reasons why a discounted price—rather than a merely low price—can make a consumer more willing to purchase. First, a high initial price can indicate the seller has chosen to supply a high-quality product. Second, when a seller with limited stock runs a clearance sale, later consumers infer that unsold stock has higher expected quality when its initial price was higher. We also suggest a behavioral explanation, which is that consumers with reference-dependence preferences are more likely to buy if they perceive the price as a bargain relative to the earlier price. Discount pricing is therefore an effective marketing technique, and a seller may wish to deceive potential customers by offering a false discount. The welfare effects of regulation to prevent fictitious pricing are subtle, with potential unintended consequences, and depend on whether consumers are sophisticated or naive. (JEL D18, D42, D83, L15, M31)     

Beyond Tariffs: The Role of Non‐Tariff Barriers in Dairy Trade in the East African Community Free Trade Area

This study used a spatial equilibrium modelling approach to quantify the relative welfare impacts of eliminating tariffs and non‐tariff barriers on trade in dairy products among East African Community (EAC) member countries. The results indicated that removing tariffs only would not produce any significant welfare improvements unless it was accompanied by trade‐enhancing measures such as reductions in non‐tariff barriers and transport costs. In the current modelling framework, net welfare gains were higher in relatively lower‐income countries like Burundi than in higher‐income countries like Kenya. This indicates that reductions in trade costs may reduce regional imbalances in the EAC.     

QUALITY DIFFERENCES,THIRD‐DEGREE PRICE DISCRIMINATION,AND WELFARE

We propose a model with two markets to analyze the welfare implications of price discrimination with quality differences. In each market a local firm that operates in that market only competes against a global firm that operates in both markets. Local firms produce higher‐quality goods than the global firm. If the quality levels of the local firms' products are the same, price discrimination is never welfare‐decreasing. If they differ, discrimination is welfare‐increasing if quantity increases. Because of a positive allocation effect of price discrimination, there are parameter values such that welfare increases while total output decreases with price discrimination. (JEL D43, D60)     

Private provision of public goods under price uncertainty

In this paper, price uncertainty is introduced into the model of voluntary provision of public goods. The analysis is carried out depending upon whether individuals make real or nominal contributions. We highlight the significant factors that determine the complex effects of changes in uncertainty on the level of provision, the level of welfare, and the gaps between equilibrium and optimal values of these variables. In particular, we show that in some situations it would be desirable to introduce artificial randomness in prices in order to alleviate the free rider problem and to increase welfare.We are indebted to two referees for their comments and suggestions.     

CREDIBLE SIGNALS OF THE RELEASE OF NEW VERSIONS

Prices can credibly signal whether a durable‐goods monopolist will offer an improved good in the future. When the future release of a new version is private information, a monopoly seller will reveal a failure to develop and market a new version with a lower price than he or she would charge in full information. A firm would be willing to pay more to innovate when consumers are uncertain than if they are informed ex ante because a failure to innovate is punished by a low equilibrium price. Consumers' uncertainty about innovation intensifies an unsuccessful innovator's Coasian problem and increases consumer welfare. (JEL D82, L12, L15)     

THE INCENTIVES FOR RESALE PRICE MAINTENANCE UNDER IMPERFECT INFORMATION

This paper considers both the incentives for and the welfare effects of resale price maintenance (RPM) in retail markets characterized by imperfect consumer information. In markets where point-of-sale information on the product is essential for sales and information on prices is costly, RPM permits manufacturers with some monopoly power to resolve two incentive conflicts with retailers. First, because retailers with price-setting powers do not appropriate the gains in profit to an upstream manufacturer from actions taken to increase demand, their incentives to inform consumers of the product and to set low prices are inadequate. This purely vertical externality results in the classic "double mark-up" of final prices. Second, when consumers' costs of price search vary, stores offering low prices and no information can exist in the market equilibrium. These discount houses free-ride on the informational services of high-price informing retail outlets — a horizontal externality. In the imperfect information setting of this paper, (1) administered pricing improves monopolists' profits by resolving the incentive conflict; (2) the profitable use of a price floor reduces the maximum retail price charged and may reduce the average retail price; (3) price floors or administered prices can be Pareto-improving and more likely welfare (surplus)-improving; (4) price floors are welfare-improving.     

THE WELFARE EFFECTS OF THIRD‐DEGREE PRICE DISCRIMINATION IN A DIFFERENTIATED OLIGOPOLY

This article examines the welfare effects of third‐degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the “strong” market (where the discriminatory price is higher than the uniform price) than in the “weak” market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely owing to an increase in the firms' profits in the case of linear demands. (JEL D43, L11, L13)     

Political culture and monopoly price determination

In this paper we study the endogenous determination of monopoly price. Our proposed game of endogenous monopoly-price setting extends the literature on monopoly-price, monopoly rent-seeking contests and monopoly rent-seeking rent-avoidance contests by (i) determining the monopoly price such that it maximizes a composite utility function that depends on two components: expected social welfare and lobbying efforts. The welfare component has a positive or no effect on the utility while the lobbying efforts have a positive, negative or no effect on the utility (ii) introducing the political culture of the government and clarifying its role in the endogenous determination of monopoly price. In the proposed model the single parameter representing political culture is the weight assigned to the enhancement of social welfare. Our main concern is with the study of the relationship between this parameter and the proposed monopoly price and, in turn, the rent-seeking rent-avoidance efforts of the potential monopoly and the consumers and their aggregate expected benefit. We are grateful to the referees for their constructive and helpful comments.     

FOOD PRICES,WAGES, AND WELFARE IN RURAL INDIA

With soaring food prices in recent years has come alarm about rising poverty in the developing world. Less appreciated, however, is that many of the poor in agricultural economies may benefit from higher wages. This study finds that wages for manual labor in rural India, both within and outside agriculture, rose faster in districts growing more of those crops with large producer price run‐ups over the 2004–2009 period. Based on a general equilibrium framework that accounts for such wage gains, rural households across the income spectrum are found, contrary to more conventional welfare analysis, to benefit from higher agricultural prices. (JEL Q17, Q18, F14)     

Former welfare clients in prison: education and self-reported learning problems

The aim of this study is to investigate educational background, educational wishes, actual participation in prison education, and self-reported learning problems among former child welfare clients in prison. A significant concern is that prisoners' educational level is far lower than for the general population. The same concern has also been expressed regarding former child welfare clients. The question is whether prisoners with a background from the child welfare system are especially vulnerable. The survey reported in this paper addressed the entire Norwegian prison population. We distributed a questionnaire containing questions about whether the prisoner or their family had been in contact with the welfare system, educational issues such as educational background, whether they wanted to participate in prison education and actually participated, and to what extent the participants had self-reported learning problems. We also investigated whether such learning problems affected participation in prison education. The results showed that around one-third of the 2065 respondents were former child welfare clients. The mean age of the respondents in the child welfare group was 31 years and 7.9% were women. The results further revealed that those who had been child welfare clients had a lower educational level and more self-reported learning problems than the general prison population, but most of them still wished to start an education while incarcerated.     

Economywide Impact of Maize Export Bans on Agricultural Growth and Household Welfare in Tanzania: A Dynamic Computable General Equilibrium Model Analysis

Export bans have been frequently used by developing countries in recent years in an attempt to ensure domestic food supplies and insulate domestic market prices from international price hikes. This article uses Tanzania to examine the impact of export bans using a computable general equilibrium model. We find that banning cross‐border maize exports has very little effect on the national food price index and that the benefits from lower maize prices are captured primarily by urban households, while maize producer prices decrease significantly. The export ban further decreases the wage rate for low‐skilled labour and the returns to land, while returns to non‐agricultural capital and wage rates for skilled labour increase, further hurting poor rural households and thus increasing poverty for the country as a whole.     

Population Dynamics and Animal Welfare: Issues Raised by the Culling of Kangaroos in Puckapunyal

The culling of kangaroos at the Puckapunyal Army base (Australia) raises some intriguing ethical issues around animal welfare. After discussing the costs and benefits of the cull, this paper addresses the more general animal welfare issues related to population dynamics. Natural selection favours the maximization of the number of surviving offspring. This need not result in the maximization of the welfare of individuals in the species. The contrast between growth maximization and welfare maximization is first illustrated for a single population and then discussed in terms of competing populations. In the Lotka-Volterra model of competing species and its generalizations, the choice of different birthrates does not affect the population sizes at equilibrium. Welfare could be much higher at lower birthrates without even reducing numbers (at equilibrium).     

Declining Share of Small Firms in U.S. Output: Causes and Consequences

We develop a dynamic general equilibrium model, with large and small firms, to examine possible causes and welfare implications of a declining trend in small firms' share of U.S. output since 1958. Numerical experiments indicate that recent technological advances and government tiering policies that have reduced fixed setup costs of production benefit the emergence of small firms, but lower their output share due to competition for resources among firms. However, this outcome is welfare improving. Therefore, if the policy objective is to raise small firms' output share and economic welfare simultaneously, it is desirable to concentrate on increasing antitrust and deregulatory efforts.     

Dynamic modelling of long-term care decisions

This paper describes and analyzes research on the dynamics of long-term care and the policy relevance of identifying the sources of persistence in caregiving arrangements (including the effect of dynamics on parameter estimates, implications for family welfare, parent welfare, child welfare, and cost of government programs). We discuss sources and causes of observed persistence in caregiving arrangements including inertia/state dependence (confounded by unobserved heterogeneity) and costs of changing caregivers. We comment on causes of dynamics including learning/human capital accumulation; burnout; and game-playing. We suggest how to deal with endogenous geography; dynamics in discrete and continuous choices; and equilibrium issues (multiple equilibria, dynamic equilibria). We also present an overview of commonly used longitudinal data sets and evaluate their relative advantages/disadvantages. We also discuss other data issues related to noisy measures of wealth and family structure. Finally, we suggest some methods to handle econometric problems such as endogeneous geography.     

A MACROECONOMIC MODEL ON THE QUALITY OF GOVERNMENT AND ECONOMIC PERFORMANCE

We determine the relative rewards to producers, private rent‐seekers, and bureaucrats and allocation of talent between them in a general equilibrium model. Unproductive activity creates a negative externality on the relative rewards to producers. If the size of bureaucracy is exogenously given, among the multiple equilibria, the one with fewer private rent‐seekers yields higher welfare. By choosing a small size of bureaucracy, the government can establish the superior equilibrium as the unique outcome, which also achieves the constrained optimum. If the population of bureaucrats is endogenously determined, however, a larger bureaucracy enhances production and welfare. The size of government and economic performance are jointly determined, and their relationship depends on the quality of government. Our result supports the view that the size of government may not matter much; what is important is the quality of government. (JEL E60, E61, H00)