Institutional price regulations will, in general, distort the economy away from an optimal allocation of resources. This thesis presents a model to consider a problem to examine the next best solution satisfying institutional price constraints.
In our model, an economy with both production and consumption sides is considered unlike previous models, which considered only one side of the economy.
A relation among market price, shadow price, and production activity level is considered. The zero activity level condition with negative shadow profit and the negative market profit condition with positive shadow profit are suggested. A complementarity relation with market price, shadow price, and institutional price constraints is examined. Unlike previous models, in case of an additively separable utility function and minimum and ceiling price constraints, even though the price constraint of a commodity is not binding, we can not say that its market price should be equal to its shadow price.