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Unformatted text preview: 1 Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Snje Reiche 2 Outline Externalities Pigouvian Taxes Coase Theorem Information problem Second best policies Common Property Resources (Nothing on imperfect competition) 3 Efficiency and Externalities ( 29 B A A A z x z z x u A A , , max , A A A e pz x = + Consider a two person, two good economy Individual As maximisation problem, taking Bs choice of x and z as given: ( 29 = B A A A x z z x u A , , ( 29 ( 29 p z z x u z z x u B A A A x B A A A z A A = , , , , Assume that good z is produced by using good x: 1 unit of z requires p units of x. ( 29 p z z x u B A A A z A = , , Marginal utility w.r.t x A 4 Efficiency and Externalities ( 29 B B B z x z x u B B , max , B B B e pz x = + Individual Bs problem: ( 29 ( 29 p z x u z x u B B B x B B B z B B = , , subject to: B A MRS MRS = where is the inefficiency? 5 ( 29 B B B z z x x z x u B A B A , max , , , B A B A B A e e pz pz x x + = + + + Pareto efficiency: subject to: ( 29 = B A A A x z z x u A , , ( 29 p z z x u B A A A z A = , , ( 29 = B B B x z x u B , ( 29 ( 29 p z z x u z x u B A A A z B B B z B B = + , , , ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 B A A A x B A A A z B B B x B B B z B A A A x B A A A z z z x u z z x u z x u z x u z z x u z z x u A B B B A A , , , , , , , , , , + = MRS for A (Social) MRS for B ( 29 A B A A A u z z x u = , , f.o.c.: 6 Efficiency and Externalities Social marginal benefit differs from private marginal benefit, and so social MRS differs from private MRS Individuals set private MRS equal to price, so inefficiency 7 Efficiency and Externalities Z B MC, MB MC MB B SMB * B z B z ( 29 B A A A z z z x u B , , in partial equilibrium, such that ( 29 ( 29 1 , , , = = B B B x B A A A x z x u z z x u B A 8...
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This note was uploaded on 03/07/2012 for the course ECON 201 taught by Professor Cowell during the Spring '10 term at LSE.
 Spring '10
 Cowell
 Economics, Externalities, Perfect Competition

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