Counteracting Inequality in Markets via Convex Pricing

TL;DR

This paper analyzes how convex pricing mechanisms, like increasing block tariffs, can be designed to balance efficiency and equality in markets for divisible goods, supported by theoretical guarantees and algorithms.

Contribution

It introduces a convex pricing rule that guarantees equilibria maximizing a CES welfare function, allowing control over equality-efficiency tradeoff.

Findings

Convex pricing equilibria maximize CES welfare functions.

A parameter controls the tradeoff between equality and efficiency.

An iterative algorithm computes these pricing rules.

Abstract

We study market mechanisms for allocating divisible goods to competing agents with quasilinear utilities. For \emph{linear} pricing (i.e., the cost of a good is proportional to the quantity purchased), the First Welfare Theorem states that Walrasian equilibria maximize the sum of agent valuations. This ensures efficiency, but can lead to extreme inequality across individuals. Many real-world markets -- especially for water -- use \emph{convex} pricing instead, often known as increasing block tariffs (IBTs). IBTs are thought to promote equality, but there is a dearth of theoretical support for this claim. In this paper, we study a simple convex pricing rule and show that the resulting equilibria are guaranteed to maximize a CES welfare function. Furthermore, a parameter of the pricing rule directly determines which CES welfare function is implemented; by tweaking this parameter, the social planner can precisely control the tradeoff between equality and efficiency. Our result holds for any valuations that are homogeneous, differentiable, and concave. We also give an iterative algorithm for computing these pricing rules, derive a truthful mechanism for the case of a single good, and discuss Sybil attacks.