The Socially Optimal Use of Resources

Abstract

The last chapter was concerned with the maximisation of profits, given prices (or demand schedules in the monopoly case) and the interest rate. Now, prices and interest rates become internal to the system. The object is to maximise utility, given a social-welfare function, together with conditions of supply. Initially the fundamentals of the problem are explored through the so-called ‘cake-eating model’ originally developed by Hotelling (1931). The model is later elaborated to embrace various real-world complications.