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Unformatted text preview: ECONOMICS 100A Professor Dan Acland 11/09/10 Lecture 22 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. NO ICLICKER QUIZ TODAY ANNOUNCEMENTS Slide 1. My office hours this week are 2:00 to 4:00pm in 697 Evans. : Announcements LECTURE Slide 1. Negative production externality: pollution : Lecture outline: A. Market equilibrium B. Social optimality 2. Pigouvian tax 3. Vouchers (cap and trade) A. Deriving demand for vouchers B. Equilibrium voucher price and comparison to Pigouvian tax 4. Pros and cons of taxes and vouchers. A. Pigouvian tax versus taxing the actual externality (i.e. pollution tax) B. Pollution tax versus cap and trade vouchers C. Taxes and/or vouchers versus command and control Lets start out by reviewing what we did last time: Slide- Recall: : 1. Negative Production Externality: returning to the pollution example o To solve for market equilibrium we need private marginal benefit (PMB) and private marginal cost (PMC). (In other words, demand and supply.) o To solve for social optimality, we need social marginal benefit (SMB) and social marginal cost (SMC). - PMB = MWTP (Which is inverse demand, given quasi-linear preferences.) o Demand: . o Solve for p to get inverse demand: p d (X)= A X- SMB = PMB (Because theres no consumption externality in this case.) - PMC = MC (Which is inverse supply.) o Supply: o Solve for p to get inverse supply: p s (X)= - B + X This is the opportunity cost to firms of the inputs they have to pay (internal private marginal cost). So, the PMC = inverse supply curve. To find the marginal cost to society for each washing machine: - SMC = PMC + MC E o Let G be the units of pollution (gunk), and let C E (G) = G 2 be total external cost of pollution. o Let G(X) = X be the units of pollution per washing machine o Thus the total external cost of washing machines is: C E (X) = C E (G(X)) = (X) 2 = 2 X 2 This is the total cost per washing machine. o And the marginal external cost of a washing machine is just the derivative of that with respect to X: d . dx d . dx MC E (X) = C E (X) = 2 X 2 = 2 2 X A p X d (p)= B + p X s (p)= ECONOMICS 100A ASUC Lecture Notes Online: Approved by the UC Board of Regents 11/9/10 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course....
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