Knowledge that Transforms

A method for optimization in nonlinear stochastic models is proposed in this paper, and applied to study monetary and fiscal policy in the St. Louis econometric model. Essentially, the method is to simulate the model in a number of stochastic simulations in which the coefficients of the model are treated as random, to use the results of the stochastic simulations to find parsimonious representations of the time form of the policy multipliers by estimating autoregressive moving-average regressions for the effects of policy on the relevant endogenous variables, and then to use these equations in computing optimal policy. The method is applied to the study of monetary and fiscal policy for the St. Louis model over a 60-period horizon with encouraging and sensible results.

This paper deals with the relationship between the monopoly price and the socially optimal price in the presence of consumption diseconomies. The above relationship is derived from characteristics of the utility function. THE THEORY of external diseconomies asserts that the socially optimal price of a good causing a diseconomy should be above its marginal cost. We also know that a monopolist will charge a price above its marginal cost. The purpose of this paper is to determine the relationship between these two prices. In addition, we demonstrate that knowledge of consumer preferences permits one to infer whether the monopoly price would be higher or lower than the socially optimal price. This relationship is of both theoretical and applied interest. Baumol and Oates [1] suggested some practical ways to measure the marginal harm to the environment in the presence of external diseconomies, using certain environmental standards. In general, the determination of the socially optimal price is impossible because the elements determining the price are unobserved. We will prove a theorem based on elasticity characteristics of the utility function, which yields policy information necessary to achieve a social optimum. We shall also prove that a large class of utility functions will yield the same optimal prices; in particular, the socially optimal price is equal to the monopoly price. In the past, it has been commonly asserted that the monopolistic price would be higher than the socially optimal price in the presence of consumption diseconomies. This view is illustrated by Naor [8], and in a more general case by Knudsen [7]. They do not deal with a general model of external diseconomies, but rather with a specific case of a queuing model with a waiting line. Within this context, including some restrictions on the utility function, they derive the above relationship between the monopolistic and the socially optimal prices. Buchanan [2] also discusses the possibility of having a socially optimal price higher than the monopolistic price. Examples of such possibilities in the context of diseconomies arising from congestion are supplied by Edelson [6].2 Similar problems were discussed by Diamond and Mirrlees [5] in dealing with the relationship between the Pareto optimal situation and the competitive equilibrium. In addition, a general discussion of optimal surcharge in cases of consumption externalities is given in Diamond [4]. ' Research for this paper was done while I. Luski was Visiting Assistant Professor of Economics, University of Florida. We are indebted to Milton Z. Kafoglis and David Levhari for helpful comments and suggestions. 2 It can be shown that the results of his examples can be inferred from our theorem.

[The standard two-period consumer choice problem, where current consumption must be decided upon subject to uncertainty about future income and prices is considered in this paper. Previous analyses have been limited to an economy where either there is only one commodity or consumer preferences have a restrictive form. The primary objective of this paper is to generalize these analyses so that these limitations are eliminated. This is accomplished by applying the theory of duality.]

[This paper deals with the question of appropriately specifying the error structure in equations nonlinear in the parameters. An approach is presented which nests various disparate hypotheses (including those of additive normal and multiplicative lognormal error distributions) and suggests an approximate testing procedure. An example is given in which the method is applied in the context of estimating an aggregate production function for the U.S..R.]

[This article uses the concept of "cone of interior displacements," which extends the notion of differentiability, to set up a characterization of Pareto optima in non-convex economies. A general theorem asserting that a Pareto optimum is a PA equilibrium is given and specifications are discussed. It is finally argued that the usual formulation of the doctrine of "marginal cost pricing"--as a doctrine Pareto optimal states in a non-convex decentralized economy--has unsatisfactory logical basis, and a way of defining a minimum degree of centralization inherent to non-convex economies is suggested.]