macro-12-win-hw1 - Public economics c Mattias K Polborn...

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Unformatted text preview: Public economics c Mattias K. Polborn prepared as lecture notes for Economics 511 MSPE program University of Illinois Department of Economics Version: August 8, 2009 Contents I Competitive markets and welfare theorems 6 1 Welfare economics 7 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.2 Edgeworth boxes and Pareto efficiency . . . . . . . . . . . . . . . . . . . . . . . . 8 1.3 Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.4 First theorem of welfare economics . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.5 Efficiency with production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.6 Application: Emissions reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.7 Second theorem of welfare economics . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.8 Application: Subsidizing bread to help the poor? . . . . . . . . . . . . . . . . . . 25 1.9 Limitations of efficiency results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.9.1 Redistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.9.2 Market failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.10 Utility theory and the measurement of benefits . . . . . . . . . . . . . . . . . . . 29 1.10.1 Utility maximization and preferences . . . . . . . . . . . . . . . . . . . . . 30 1.10.2 Cost-benefit analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 1.11 Partial equilibrium measures of welfare . . . . . . . . . . . . . . . . . . . . . . . . 39 1.12 Applications of partial welfare measures . . . . . . . . . . . . . . . . . . . . . . . 42 1.12.1 Welfare effects of an excise tax . . . . . . . . . . . . . . . . . . . . . . . . 42 1.12.2 Welfare effect of a subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1.12.3 Price ceiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1.12.4 Agricultural subsidies and excess production . . . . . . . . . . . . . . . . 45 1.13 Non-price-based allocation systems . . . . . . . . . . . . . . . . . . . . . . . . . . 46 II Market failure 50 2 Imperfect competition 51 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 2.2 Monopoly in an Edgeworth box diagram . . . . . . . . . . . . . . . . . . . . . . . 52 1 2.3 The basic monopoly problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 2.4 Two-part pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 2.4.1 A mathematical example of a price-discriminating monopolist . . . . . . . 56 2.5 Policies towards monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.6 Natural monopolies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 2.7 Cross subsidization and Ramsey pricing . . . . . . . . . . . . . . . . . . . . . . . 61 2.8 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2....
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macro-12-win-hw1 - Public economics c Mattias K Polborn...

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