TOCPREVNEXTINDEX

 


VII: SOCIAL VALUATION OF FACTORS

This chapter discusses the determination of social factor prices in the general equilibrium model. Lack of information often makes the empirical estimation of general equilibrium models difficult or impossible. However, the PAM identity-divergences equal the difference between private and social values-suggests a less direct approach to estimation. Beginning with observed (private) factor prices, one derives social prices by adjusting these prices for the impacts of divergences. Factor prices are affected directly by policy-imposed distortions in factor markets (such as rent controls, interest-rate regulations, and minimum wages) and by factor market imperfections (such as monopsony or monopoly power). Observed factor prices can also be affected indirectly by commodity market divergences and macroeconomic distortions. Furthermore, the patterns of input use can change as producers adjust output levels to social output prices and input combinations to social input prices. If output price response and input substitution occur in a large number of industries, aggregate demand for each factor input can shift, altering factor prices.


TOCPREVNEXTINDEX