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The Efficiency of Competition as an Allocator of Resources: II. External Economies of Consumption*

Published online by Cambridge University Press:  07 November 2014

Murray C. Kemp
Murray C. Kemp*
Affiliation:
McGill University
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Extract

Economists have long been aware of the interdependence of the consumption and the consumption plans of individuals. For the most part they have been interested in the implications of this interdependence for the theory of market behaviour rather than in its implications for welfare. The purpose of this article is to give a detailed diagrammatic treatment of the welfare implications of external economies and diseconomies of consumption. In particular, we shall discuss the fiscal measures which, in a competitive economy, would provide the incentives necessary to the attainment of an optimal allocation of resources.

We shall distinguish from each other, and consider separately, three types of interdependence of consumption and consumption plans.

(i) The consumption of a particular commodity X by a particular individual A may increase (decrease) the satisfactions of other individuals, that is, generate external economies (diseconomies).

(ii) The consumption of a particular commodity X may change the satisfactions of other individuals independently of the identity of the consumer.

(iii) The receipt of money income by a particular individual A may, independently of his manner of disposal of the income, change the satisfactions of other individuals.

No doubt this classification is not exhaustive. Thus no place is found for various external repercussions of consumption which might be discussed in a dynamic model, that is, in a model permitting instability of preference maps. Even in static models a place could be found for types of interdependence not discussed here. Many of these excluded types, however, can be described as combinations of those already enumerated (for example, a particular act of consumption may lower the satisfaction of some, raise that of other individuals) and can be treated by the techniques to be developed for their analysis.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 21 , Issue 2 , May 1955 , pp. 217 - 227
Copyright
Copyright © Canadian Political Science Association 1955

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Footnotes

*

This is the second of two papers on the efficiency of competition as an allocator of resources. The first, dealing with external economies of production, appeared in this Journal, XXI, no. 1, Feb., 1955, 30–42.

Section V of this paper arose out of a stimulating correspondence with Mr. Martin Bailey.

References

1 See especially Rae, John, The Sociological Theory of Capital (London, 1905)Google Scholar; Veblen, Thorstein, The Theory of the Leisure Class (New York, 1899)Google Scholar; Cunynghame, Henry, “Some Improvements in Simple Geometrical Methods of Treating Exchange Value, Monopoly and Rent,” Economic Journal, II, 35–9Google Scholar; Pigou, A. C., “The Interdependence of Different Sources of Demand and Supply in a Market,” Economic Journal, XXIII, 18–24.Google Scholar More recently, Duesenberry, James S. (Income, Saving and the Theory of Consumer Behavior, Cambridge, Mass., 1949)Google Scholar, and Liebenstein, H. (“Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand,” Quarterly Journal of Economics, LXIII, 183–207)Google Scholar have treated the problem.

2 The most complete treatment of the implications for welfare is that of Tintner, G. in “A Note on Welfare Economics,” Econometrica, XIV, 69–78.Google Scholar This article is, however, almost entirely mathematical. Other brief treatments may be found in Pigou, A. C., The Economics of Welfare (London, 1938), 190–2, 226 Google Scholar; Lerner, A. P., The Economics of Control (New York, 1944), 36–7Google Scholar; Reder, M. W., Studies in the Theory of Welfare Economics (New York, 1947), 64–7Google Scholar; Little, I. M. D., A Critique of Welfare Economics (London, 1950), 122–4.Google Scholar

3 If we think of money income and leisure as two products, the consumption of one of which (income) gives rise to external economies or diseconomies, it becomes clear that (iii) is a special case of (i). However, its special importance seems to warrant special treatment.

4 Tintner (“A Note on Welfare Economies,” 74–6) has considered the possibility that one individual's level of satisfaction may be determined by his estimates of the satisfactions of other individuals. By combining this case with case (i) above, we obtain a quite complicated third case. Not only may A's consumption of X affect B's satisfaction, but that change in B's satisfaction in turn may affect A's satisfaction. Thus I may refrain from eating chocolate because my mother dislikes my consumption of chocolate and because I want to please my mother. Since satisfaction is non-measurable, however, the fruitfulness of Tintner's hypothesis seems doubtful.

5 See Sidgwick's discussion of the development of knowledge and culture by a wealthy class. Sidgwick, Henry, Principles of Political Economy (London, 1883), 518—25.Google Scholar

6 It would be possible to argue that, while X gives pleasure to A, A's consumption of X gives offence to A. This, however, implies a peculiar and unhelpful usage of words.

7 In general one would expect b 1 b 1 to lie uniformly “outside” b0b0 , that is, to cut any radius vector from B at a point further from B than the intersection of the same radius vector with b0b0 . However, there is no logical reason why b0b0 and b 1 b 1 should not intersect. Such an intersection would imply that, over certain ranges, A's consumption of X generates external economies, over other ranges external diseconomies of consumption.

8 It would, seem that the distinction frequently made between preferences and valuations could be made operationally meaningful with the aid of the distinction between adjusted and unadjusted indifference surfaces.

9 This statement may not hold if A's consumption of X generates external economies at some consumption levels, diseconomies at other levels.

10 We shall not concern ourselves with corner optima and the corresponding inequalities of marginal rates of substitution.

11 This statement is asymmetrical, for Reder (Studies in the Theory of Welfare Economics, 65) has shown that, in the case of external economies, “ … unimpeded self-seeking will tend … to maximize welfare … .” No subsidies are necessary.

12 See McKenzie, L. W., “Ideal Output and the Interdependence of Firms,” Economic Journal, LXI, 785–803 Google Scholar; Scitovsky, T., Welfare and Competition (Chicago, 1951), 356–63.Google Scholar