GWLecture14

GWLecture14 - 1 Part IIa Paper 1 General Equilibrium and...

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Unformatted text preview: 1 Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje Reiche 2 Outline • Public goods – Lindahl prices – information failure • Mechanism design – Vickrey auctions – Clarke-Groves taxes • Books – Cowell: Ch. 12.6.1-12.6.2, 13.6.3-13.6.5 – Varian: 36.7-36.10 3 Public Goods and Market Failure • If the public good is provided privately, then • Whereas Pareto efficiency in a market with a public good requires • So private provision of the public good leads to under- provision • Why the market failure? – An additional unit of a private good goes to either consumer A or consumer B – An additional unit of public good benefits both consumers – The marginal benefits are therefore summed MRT MRS MRS B A = = MRT MRS MRS B A = + 4 Lindahl Prices • Can the first best (i.e. the Pareto efficient) amount of the public good be provided through the market? • Government decides the share of the cost borne by each individual, such that • Individual budget constraint changes from: • to B A τ τ , 1 = + B A τ τ A A A e pG x = + τ A A A e pg x = + 5 Lindahl Prices • Government asks individual A to announce her preferred consumption of G • Individual A’s maximisation problem:...
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GWLecture14 - 1 Part IIa Paper 1 General Equilibrium and...

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