Reassessing the Diamond/Mirrlees Efficiency Theorem
March 2000 Diamond and Mirrlees (1971) provide sufficient conditions for a second-best Pareto efficient allocation with linear commodity taxation to require efficient production when a finite set of consumers have continuous single-valued demand functions. This paper considers a continuum economy allowing indivisible goods, other individual non-convexities, and some forms of non-linear pricing for consumers. Provided consumers have appropriately monotone preferences and dispersed characteristics, robust sufficient conditions ensure that a strictly Pareto superior incentive compatible allocation with efficient production results when a suitable expansion of each consumer's budget constraint accompanies any reform which enhances production efficiency. Appropriate cost-benefit tests can identify small efficiency enhancing projects.
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