EEP101_lecture7 - Shadow pricing and heterogeneity DAVID...

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Shadow pricing and heterogeneity DAVID ZILBERMAN
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OUTLINE COST EFFECTIVENESS SHADOW PRICING HETEROGENEITY TAXES VS. DIRECT CONTROL UNCERTAINTY-THE WEITZMAN MODEL
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COST EFFECTIVENESS Policy makers frequently do not know the externality cost They therefore set a target level of externality control and design a policy to meet it. Cost effective policy attains a target policy at least cost
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MPC Qc Target level 1 Target level 2 A B C D AB tax target level 2 CD tax target level 1 The tax levels are shadow prices of pollution constraints Shadow prices =the benefits lost by tightening a constraint Q1 Q2 MB
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Policies to achieve cost effectiveness A tax,subsidy, tradable permits among firms MB = 20-2Q MPC =4 Initial equilibrium 20-2Q-4=0 Hence Hence Qc=8,Pc=4 When Target is Q1=4 shadow price =20-8-4= 8 Total Subsidy cost (8-4)*8=32 When Target is Q1=2 shadow price =20-4-4= 12 Total Subsidy cost (8-2)*12=72
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Heterogeneity D2 D3 D1 TD=D1+D2+D3 MPC Q0 Q1 P1 REDUCTION FROM Q0 TO Q1 TAX =AB QUANITITES MOVE FROM BLUE TO RED A B
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NUMERICAL HETEROGENEITY MB1=20-Q,MB2=20-2Q,MB3=20-4Q MPC=2 Quantity as function of price
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This note was uploaded on 03/18/2010 for the course ECON C125 taught by Professor Zelberman during the Spring '09 term at University of California, Berkeley.

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EEP101_lecture7 - Shadow pricing and heterogeneity DAVID...

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