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Unformatted text preview: Section Notes: Week 5 Outline Review of Key Concepts Public Goods Clubs & Congestion These section notes follow Course Readings Chapter 7 and 7b. Review of Key Concepts Measuring Welfare Total social welfare is total social bene ts minus total social costs. These can generally be measured as the area underneath the marginal social bene t minus the area under the marginal social cost curves, at the quantity that is being produced in equilibrium. We can also think of total social welfare as the sum of the welfare of all individuals or groups in our model. This is essentially calculated in the same way as total social welfare. Table 1 shows relevant calculations for various groups in our models. Q * in this table refers to actual production at the equilibrium, not necessarily socially optimal production. Note that di erent groups can be taxed or subdized, which could change the tax below. Table 1: Measuring Total Social Welfare Group Bene ts Costs Producers Revenue = Q * p ´ Q * MPC ( q ) dq +tax Consumers ´ Q * MPB ( q ) dq + subs Amount Paid = Q * p Government Taxes ( tQ t ) Subsides ( sQ s ) Environment ´ Q * MEB ( q ) dq ´ Q * MEC ( q ) dq Total ´ Q * MSB ( q ) dq ´ Q * MSC ( q ) dq Deadweight Loss Deadweight loss is the di erence between actual total social welfare and total social welfare when the outcome is socially optimal (or at the pareto optimum). Always measure DW loss as TSW so- TSW actual . Taxes and Subsidies Taxes (or subsidies) can be calculated as the necessary increase in per unit costs or bene ts necessary to bring production to a level of Q SO , which is the socially optimal level of production and is known. Under perfect competition, monopoly, monopsony, and middleman equilibrium conditions must still be met. Table 2 shows equilibrium conditions with a tax for a negative externality. Try to think about who is taxed in each situation. Does it matter which group is taxed? Please note that taxes or subsidies generally cancel out in welfare calculations when the taxes are (properly) designed to address an externality: taxes are just a transfer between di erent parties. 1 Table 2: Taxes & Equilibrium Conditions Market Type Equilbrium Condition with Externality Tax Competition MB ( Q SO ) = MC ( Q SO ) + t Monopoly MR ( Q SO ) = MC ( Q SO ) + t Monopsony MB ( Q SO )- t = MO ( Q SO ) Middleman MR ( Q SO )...
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- Spring '09
- Public Good, Externality, total social welfare