micro-fall-2007-21

micro-fall-2007-21 - Externalities The pareto-optimal...

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Externalities 6 - ¯ s s x ; y x PO = y f ( ¯ s ; L ) s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x & = y & The pareto-optimal allocation in an economy with production externalities Ani Guerdjikova ECON 313 Fall 2007 209 / 237
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Externalities The Pareto-optimum Maximize the utility of the consumer: u ( x ; s ) = x ( 1 + ¯ s & s ) under the technological constraints of the economy: x ± 4 s 1 4 n 1 4 0 ± n ± L 0 ± s ± ¯ s Conditions for a Pareto optimum: n = L x = 4 s 1 4 L 1 4 MRS = u / s u / x = x 1 + ¯ s & s = MP s = s & 3 4 L 1 4 Ani Guerdjikova ECON 313 Fall 2007 210 / 237
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Externalities The Pareto-optimum (contd.) Allocation n PO = l = L x = y = 4 & 1 + ¯ s 5 ± 1 4 L 1 4 s = ( 1 + ¯ s ) 5 The market equilibrium is not Pareto-optimal. The toxic emissions in equilibrium are excessively high, whenever s < ¯ s . Ani Guerdjikova ECON 313 Fall 2007 211 / 237
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Internalizing External E/ects Internalizing External E/ects ( i ) Taxes or subsidies (Pigou) ( ii ) Allocation of property rights (Coase) ( iii ) Integrating the decision-making units. Ani Guerdjikova ECON 313 Fall 2007 212 ± 237
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Internalizing External E/ects Taxes and Subsidies (Pigou) If activity e is taxed at a rate t , the decision-maker will choose a level of activity e & so that: B 0 ( e & ) = C 0 ( e & ) + t . The socially optimal level e PO satis&es: SB 0 & e ± = SC 0 & e ± . If the tax rate t is correctly chosen, the decision-maker will choose the socially optimal level of activity: e & = e .
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This note was uploaded on 04/30/2008 for the course ECON 3130 taught by Professor Masson during the Fall '06 term at Cornell.

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micro-fall-2007-21 - Externalities The pareto-optimal...

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