Ramsey prices are prices that are Pareto optimal subject to a constraint on the total profits of a single supplier or group of suppliers. In particular, because a firm whose activities are characterized by scale economies will lose money if it sets the prices of its products equal to their marginal costs, Ramsey prices become for that firm the prices that are optimal (economically efficient) given the financial feasibility requirement that the firm’s profits be non-negative. The same Ramsey prices can also be shown to be those necessary for maximization of the sum of consumers’ and producers’ surpluses.
KeywordsContestable markets Hyperplanes Inverse elasticity Lump-sum taxes Marginal cost pricing Optimal taxation Pareto efficiency Ramsey pricing Ramsey, F. R. Second best
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