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lect01-28-10 - Marginal Cost(MC Cost of Producing...

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Unformatted text preview: Marginal Cost (MC) - Cost of Producing Additional (or Last) Unit Marginal External Cost (MEC) - External Cost of Producing Additional (or Last) Unit Marginal Social Cost (MSC) - Social Cost of Producing Additional (or Last) Unit MSC = MC + MEC Relationship of Supply Curve and MC Price of Corn P$5 4 S = MC P =4 Q=50 MC=4 3 2 1 P QS $1 5 2 20 3 35 4 50 5 60 Q CORN o 10 20 30 40 50 60 70 80 Quantity of Corn Supply Curve and MSC Price of Corn P$5 P =4 Q=50 MC=4 MEC = 1 MSC = 5 4 3 2 1 S = MC P QS $1 5 2 20 3 35 4 50 5 60 Q CORN o 10 20 30 40 50 60 70 80 Quantity of Corn Supply Curve and MSC Curve Price of Corn MSC = MC + MEC S = MC P$5 P =4 Q=50 MC=4 MEC = 1 4 3 2 1 P QS $1 5 2 20 3 35 4 50 5 60 Q CORN o 10 20 30 40 50 60 70 80 Quantity of Corn Market for Corn Price of Corn P$5 4 3 2 1 S=MC D 10 20 30 40 50 60 70 80 Quantity of Corn o Q Market Outcome vs. Socially Desirable Outcome MSC = MC + MEC Price of Corn P$5 S=MC 4 3 2 1 Qm = 35 Qsd = 28 D 10 20 30 40 50 60 70 80 Quantity of Corn o Q Policy Implications? Possible Corrective Policy Instruments Direct Controls, Taxes/Subsidies, Permits Levels of Policy Instruments? Determining Corrective Tax Level Price of Corn MSC = MC + MEC S=MC P$5 4 3 2 1 Qm = 35 Qsd = 28 MEC= 1 Tax = 1 MEC { D o 10 20 30 40 50 60 70 80 Quantity of Corn Q Full Cost Pricing Price of Corn MSC = MC + MEC S=MC Psd = MSC MEC P$5 4 Psd = 3.5 Qm = 35 Qsd = 28 MEC= 1 Tax = 1 3 2 1 { "Full Cost Price" D 10 20 30 40 50 60 70 80 Quantity of Corn o Q Food Prices Not As High As We Would Want Price of Corn MSC = MC + MEC S=MC P$5 Psd = MSC "Full Cost Price" 4 3 2 1 MEC { D o 10 20 30 40 50 60 70 80 Quantity of Corn Q "Food Prices Not As High As We Think" Price of Corn MC S=MC-Subsidy P$5 4 3 2 1 Subsidy { D o 10 20 30 40 50 60 70 80 Quantity of Corn Q ...
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