section2_brian - = P C = P M = P N = P MM = P = Which price...

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1 Section Notes Week 2 Outline Key Concepts Announcements Externality Numerical Example Over- or Under- Production Welfare Graphing Regulation Discussion Internalization Calculating Outcomes Competition Monopoly Monopsony Middleman Social Planner M. Benefit MPB MR MPB MR MSB=MPB+MEB M. Cost MPC MPC MO MO MSC=MPC+MEC Solution MPB=MPC MR=MPC MPB=MO MR=MO MSB=MSC Recall that: MR = d d Q Revenue = d d Q (Q · MPB(Q)) = MPB(Q) + Q · d d Q MPB(Q) MO = d d Q Outlay = d d Q (Q · MPC(Q)) = MPC(Q) + Q · d d Q MPC(Q) Putting numbers to it Let marginal private benefit of output Q be given by P = 12 - Q , marginal private cost by P = 2 Q . Suppose that production generates a negative externality, with marginal cost as a function of output given by MEC = 1 . 5 + 0 . 5 Q . Let’s assume there are no positive externalities. Find the equations for: MR: MO: MSB: MSC: Now we’re going to go through the case of (perfect) competition. Solve out the competitive case quantity and price ( Q C ,P C ).
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2 Next find the socially optimal quantity and price ( Q * ,P * ). Try solving out the other outcomes if you have time. Q C = Q M = Q N = Q MM = Q *
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Unformatted text preview: = P C = P M = P N = P MM = P * = Which price instrument (tax or subsidy) would you recommend? Calculate the optimal tax or subsidy. Recall that a tax acts as a wedge: the right tax is the distance between the corresponding marginal benefit and marginal cost curves at the optimal quantity (i.e. τ C = MPB ( Q * )-MPC ( Q * ), τ M = MR ( Q * )-MPC ( Q * ), etc.). τ C = τ M = τ N = τ MM = 3 Graphically Become extremely comfortable with graphs such as the following: Welfare Under Competition: Consumer Surplus Producer Surplus Env. Welfare Govt Welfare Unregulated A + C + D + E G + H + I + K + L- (B+D+E+F+H+I+L) Tax A K + L- (D + H + L) C + D + G + H Quota A C + D + G + H + K + L- (D + H + L) Subsidy A C+D+E+F+G+H+I+J+K+L- (D + H + L)- (E + F + I + J) What’s the deadweight loss for the unregulated competitive equilibrium? What’s the dead-weight loss with an optimal (Pigouvian) tax?...
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section2_brian - = P C = P M = P N = P MM = P = Which price...

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