EEP101_lecture5 - Consumption Externalities Regulating...

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Chapter 5: Externality policies Consumption Externalities Regulating 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 t a x 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) Middle men (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 Using 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 Using upper bound on price, or a standard The upper bound price is P* Minimum Quantity Q* P*
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Optimal policy: monopoly If Q*<Qm monopoly is over polluting Regulation: Tax, subsidy,standard The tax=MR-MPC a-2bQ*-(c+dQ*) (2b+d)(a-c-e) MR minus MPC at Q* (a-c)- ------------------ (b+d+f) 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
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This note was uploaded on 04/04/2010 for the course C 125 taught by Professor Zilberman during the Spring '09 term at University of California, Berkeley.

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EEP101_lecture5 - Consumption Externalities Regulating...

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