EEP101_lecture5 - Chapter 5: Externality Policies...

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Chapter 5: Externality Policies Consumption externalities Regulation of monopolies and middlemen Positive externalities Education and direct control Externalities from cigarette smoking The economics of illicit drugs
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Production Externalities: Example Inverse Demand (D) = Marginal Benefit (MB) = a - bQ Marginal Private Cost (MPC) = C¢(Q) = c + dQ Marginal Externality Cost (MEC) = e + fQ Marginal Social Cost (MSC) = MPC + MEC = c + dQ + e + fQ = c + e + (d + f)Q
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Outcomes: Alternative Institutions Scenario Quantity Price Tax Competitive (a-c)/(b+d) a-b (a-c)/(b+d) Optimal (a-c-e) /(b+d+f) a-b (a-c-e) / (b+d+f) Monopoly (a-c)/(2b+d) a-b (a-c)/ (2b+d) Monopsony (a-c)/(b+2d) a-b (a-c)/ (2b+d) Middlemen (a-c)/2(b+d) (a-c)/2(b+d)
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Monopoly Is Polluting Excessively $ Q D MR Qm Qc Low MSC Q*low High MSC Q* High MPC A B Low MSC = small MEC High MSC = large MEC Unregulated competition = Qc Monopoly = Qm
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Regulating the Monopoly : High MSC Case $ Q D MR Qm Qc Low MSC Q*low High MSC Q* High MPC A B Move to Q* where MB = MSC Use a tax, subsidy, or standard The tax = MR-MPC at Q* TAX
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Regulating the Monopoly: Low MSC Case $ Q D MR Qm Qc Low MSC Q*low High MSC Q* High MPC B Move to Q* where MB = MSC Use upper bound on price, or a standard The upper bound price is P* low P*
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Optimal Policy: Monopoly If Q* < Qm, monopoly is over polluting Regulation: Tax, subsidy, or standard The tax = MR - MPC a-2bQ*-(c+dQ*) (2b+d)(a-c-e) MR - MPC at Q* (a-c)- ------------------ D MSC MPC MR TAX Q* Qm
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Example: Old Numbers - Monopoly If a = 20, b = 2, c = 4, d = 2, e = 2, f = .5 Qm = 3.2 < Q* = 4 under production Intervention p = 12 Price is reduced from 13.60 to
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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_lecture5 - Chapter 5: Externality Policies...

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