Non-Separable Household Model (Household Production and Consumption Decisions in A Market Failure)

Abstract

Households in developing countries are systematically exposed to market imperfections and shadow prices play a similar role to market prices in the decision process of the household. When they apply, the shadow prices are equal to marginal utility of the consumption of food and leisure, and marginal productivity of labor. They indicate the price that the household would be willing to pay to have the corresponding constraint relaxed by one unit. Hence, household characteristics in consumption, total time endowment, exogenous cash transfer ( ), and consumption prices affect production decisions as opposed to the separable household model. Transaction costs should be reduced by the Governmental and non-governmental institutions to narrow the gap between purchasing and selling prices, and increase market participation of households and also increases their gain from changes in price.

Keywords: production and consumption decisions, market failures, shadow price, transaction costs, non-separable

DOI: 10.7176/JMCR/78-02

Publication date: April 30^th 2021