A Theory of Regulation by Pseudo Production Function

This paper proposes a theory of regulation by constructing a pseudo production function in the general equilibrium model. The theory shows that the first-best social optimum can be achieved in imperfect markets while free entry and the independent choice of price and output are retained. Three cases are presented to show this theory. My key contribution is to propose a feasible procedure to select a pseudo production function by imposing a break-even tax-subsidy scheme on the initial production function. The pseudo production function designed in accordance with the competition pattern changes the incentives of firm's entry and price decisions then induces the profit-maximizing firm to maximize social benefits