jpet 1532 LR - Boston University.pdf

PUBLIC SECTOR RATIONING AND PRIVATE SECTOR SELECTION SIMONA GRASSI University of Lausanne CHING-TO ALBERT MA Boston University Abstract We study the interaction between nonprice public rationing and prices in the private market. Under a limited budget, the public supplier uses a rationing policy. A private firm may supply the good to those consumers who are rationed by the public system. Consumers have different amounts of wealth, and costs of providing the good to them vary. We consider two regimes. First, the public supplier observes consumers’ wealth information; second, the public supplier observes both wealth and cost information. The public sup- plier chooses a rationing policy, and, simultaneously, the pri- vate firm, observing only cost but not wealth information, chooses a pricing policy. In the first regime, there is a con- tinuum of equilibria. The Pareto dominant equilibrium is a means-test equilibrium: poor consumers are supplied while rich consumers are rationed. Prices in the private market increase with the budget. In the second regime, there is a unique equilibrium. This exhibits a cost-effectiveness ra- tioning rule; consumers are supplied if and only if their cost–benefit ratios are low. Prices in the private market do not change with the budget. Equilibrium consumer utility is Simona Grassi, Faculty of Business and Economics, Department of Economics and Econo- ´ metrics, and Institut d’Economie et de Ma