The Social Cost of Input Distortions: A Comment and a Generalization
Abstract
Daniel Wisecarver and Richard Schmalensee in two recent papers on the social cost of input market distortions have committed a rather interesting error. They find a different measure of welfare loss due to an input price distortion depending upon whether the measure is in the output or input market. This is incorrect, as intuition surelv argues. and the source of the error lies in improper use of the Taylor's series expansion. Correcting the error suggests a worthwhile generalization.
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