Surplus Maximization and Price Discrimination in General Equilibrium: Part I

Regulators of natural monopolies advocate inducing monopolies to maximize the sum of consumer and producer surplus to the extent possible. Although such maximization is efficient in partial equilibrium, its general equilibrium properties have not yet been fully explored. We study the welfare properties of surplus maximization in a general equilibrium model that accounts for all interactions with other markets. We do so by embedding a single perfectly discriminating monopolist in an otherwise standard Arrow-Debreu economy. We find that although equilibria are efficient, not all Pareto optima can be decentralized. When the monopolist has increasing returns to scale, a tension arises between surplus maximization in a single market and fulfilling certain social objectives.