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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 benet and marginal cost curves at the optimal quantity (i.e. C = MPB ( Q * )-MPC ( Q * ), M = MR ( Q * )-MPC ( Q * ), etc.). C = M = N = 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) Whats the deadweight loss for the unregulated competitive equilibrium? Whats the dead-weight loss with an optimal (Pigouvian) tax?...
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- Spring '09