4Lecture

4Lecture - additional spray causes an external damage...

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Lecture 4 14:54 Responses to externalities Assignment of property rights and bargaining  Mergers Quotas  Standards Market Formation: Cap and Trade Voluntary agreements Education (changing preferences) Through any of these policies can achieve socially optimal provisions they have  significant consequences for distribution of economic benefits Principle of targeting: policy should target the externality-producing activity—production  of consumption The Pigouvian Tax Assume the cotton farmer wants to use an insecticide to spray his crops Although higher profits are achieved if the cotton farmer sprays 4 times a year each 
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Unformatted text preview: additional spray causes an external damage Sprays per year Cotton farm profits 1 100 2 150 3 175 4 185 5 180 Impose a tax on production equal to the MEX at the socially optimal output Q*. Call it t*. Firms treat the tax as an addition to their MPC, it shifts the MPC up by t*. Pigovian Tax: Welfare effects Top brown portion goes to the consumer Rectangle goes to government Yellow bottom goes to producer MC = 5 + 20Q P = 500-15Q P = MC 500-15Q = 5 + 20Q Q = 1414 P = 500 15 x 14,14 = 288 P = MSC MSC = 5 + 20Q + 5Q = 5 + 25Q = 500-15Q Q* = 12.4 14:54 14:54...
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4Lecture - additional spray causes an external damage...

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